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Self Managed Super Fund (SMSF) Article
Taxman's binding and not-so-binding rulings

By Tony Negline.

This article may be out of date.

28th May 2008

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In December 1982, the tax office began to issue public rulings to provide “a method of publishing and disseminating decisions on interpretation of the laws administered by” the ATO.  In other words the rulings tell taxpayers how to satisfy a certain part of the tax laws in order to avoid getting into trouble.

The tax administration laws allow the tax office to release rulings in relation to a wide range of taxation matters.  These laws give specific protection to taxpayers who rely on the final version of these rulings as long as the taxpayer is using a ruling that relates to current tax law.

This specific protection says that if the ATO's interpretation is found to be wrong, for example because of a Court decision, the ATO cannot go back and claim tax and other penalties from taxpayers who have relied on these rulings.

Since 1982 the ATO has created a wide range of other publications to inform its “clients” about their statutory obligations.  Some are these are formal documents and others are merely newsletters.

Most of these new publications do not have any specific protection for taxpayers which means if the ATO is found to be wrong or changes its interpretation there is no protection for taxpayers.  With all these publications the ATO always reserves the right to claim unpaid taxes from anyone who has relied on a particular document.  The ATO tends to say that if a publication is incorrect it will not apply penalties or seek interest on the late payment of taxes.

Are these documents worth anything if they do not stop the tax office from claiming unpaid taxes ?  It is hardly revolutionary to say that only a tiny minority of taxpayers want to pick a fight with the Australian Taxation Office.  One way to possibly avoid these fights is to attempt to use best endeavours to follow all the ATO's publications.  Before using an ATO document a taxpayer should know what its status is.

Without question, a major client segment for the ATO is Self Managed Super Funds.  Consequently the ATO spends a great deal of time preparing publications to help everyone who uses or works with SMSFs.  Hardly a week goes by without another new ATO document being released specifically about, or related to, SMSFs.

The range of documents might be any of the following: Tax Rulings or Determinations, Self Managed Superannuation Funds Rulings or Determinations, Product Rulings, Miscellaneous Tax Rulings, Interpretative Decisions, Practise Law Statements or a new newsletter called SMSF News.

Many SMSF trustees probably expect their advisers to do the job of keeping up to date with all the ATO's pronouncements.  A super fund trustee can delegate their responsibilities but this does not absolve the trustee from the actual responsibility of making sure their fund is run correctly.  Theoretically therefore anyone who runs their own super fund should be familiar with all these various publications.

A good example of a recent ATO publication is a draft Self Managed Super Fund Ruling on Business Real Property or BRP (SMSF 2008/D3).  No one should under-estimate the complexity of this issue.  This draft ruling, which the ATO does not expect to have finalised until later this year, runs to 68 pages and in our estimation doesn't waffle and isn't overly repetitious.

BRP is real property used wholly and exclusively in the running of one or more businesses and the definition of BRP is important to an increasing number of SMSFs.  One of the key issues about BRP is that a super fund can acquire it from members, their relatives or related entities (such as companies or trusts) at a genuine market value.

For example suppose I personally own a shop in a normal shopping strip and above the shop is a small flat which can be used for light commercial or residential purposes.  Assume that I have  rented the flat out to a uni student.  I think it's a pretty good investment and intend to keep it for an indefinite period.  I would like to sell it to my super fund for cash flow management purposes.  Is this property being used wholly and exclusively in the running of a business?

The ruling says that, “the fact that a part of the real property is not used at all will not result in the failure to meet the 'wholly and exclusively' test... a minor or insignificant or trifling non-business use of the property can also be accommodated ...”

Typically with these sorts of properties about 20% - 30% of the total building will be the flat.  It would seem reasonable to conclude that renting the upstairs flat to the uni student is not minor, insignificant or trifling and this stops the super fund from acquiring the property.  If the flat was rented to an accounting practise then the whole property is used for business purposes and acquisition could take place.  If the flat were to be left vacant, the wholly and exclusively rule might be satisfied.

The penalty for breaching the acquisition of assets from member's provision is one years jail or its monetary equivalent.  Breaching this provision is not an option.

When the ruling is finalised it will not be a ruling which can provide full protection to those who follow it.  At this point in time, the Superannuation Minister, Senator Sherry, is looking into some aspects of SMSFs.  Hopefully he might consider giving the ATO the power to issue binding rulings in relation to the super laws.

Summary of range of ATO documents impacting SMSFs:

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