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Self Managed Super Fund (SMSF) Article
Super fund asset transfer can be a legal minefield

By Tony Negline.

This article may be out of date.

4th February 2009

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Transferring assets to a small super fund is a popular strategy and one topic which we have written about regularly over the last five years.

The transaction can occur in two distinct ways – either the super fund actually buys the asset at market value or alternatively the owner makes an in-specie contribution of the asset's market value into the fund.

The first method might be attractive to someone wants to extract cash from their super fund.  The second method is attractive for someone who wants to make use of the super contribution rules including the associated tax concessions as a means of getting additional assets into super.

Once the asset is owned by the super fund it cannot be used as a security for any debt.  Additionally super funds cannot acquire any asset from fund members, their relatives or companies or trusts which the fund members or relatives control or are deemed to control except certain types of property and most listed securities.

Capital Gains Tax will apply when the ownership of an asset changes from the original owner to the super fund and the market value of the asset upon sale or transfer is more than the assets original purchase price.

The tax law provides two potential exemptions to CGT when an asset is moved into a trust.  In one exemption an asset's owner creates a trust over an asset.  The other exemption involves the transfer of an asset to an existing trust.

In both exemptions the original owner must be the sole beneficiary of the trust and must also be absolutely entitled to the asset as against the trustee.  Additionally the trust which assumes ownership of the asset must not be a unit trust.

Throughout the years many people have sought to use these exemptions when transferring or contributing an asset to a super fund.

Last year a case was decided in the Federal Court dealing with two taxpayers who had used this exemption when selling an asset to their super fund in the 2002 financial year.  The two taxpayers involved were Helen and Peter Kafataris.

In May 1987 the Kafatarises purchased a commercial property for $612,000 as joint tenants.  In June 2002 two super funds were created and Helen's interest in the property was contributed in-specie into one of the super funds of which she was the sole member and Peter's interest was also contributed in-specie into the other fund of which he was the sole member.

Six days after the super funds were created the property was sold – in the 2003 financial year – for $4 million.  It would appear that the trustees wanted to immediately pay out the member's account balance as a lump sum.

The taxpayers argued that when the property was contributed in-specie into the super funds there was no CGT because each asset transfer was made to a fund which had a sole beneficiary who was absolutely entitled to the fund's assets.

Justice Lindgren who heard this case rejected this view.  He found that both super fund's trust deeds allowed a wide range of beneficiaries.  A person can be a beneficiary of a trust if it's to be administered for their benefit and the person "is entitled to enforce the trustee's obligation to administer the trust according to its terms".

He also found that a beneficiary will have an absolute entitlement to a trust's assets when the "beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs".

Justice Lindgren found that both super funds' trust deeds contained clauses that were "fatal" to the taxpayers' argument that the sole fund member was entitled to a fund's assets and to tell the trustee how to deal with those assets.  The super funds' trust deeds said that neither a member nor beneficiary acquire "any beneficial or other interest in a specific asset" or assets of a fund "as a whole".

The taxpayers also attempted to argue that their fund was a fund regulated under the Superannuation Industry (Supervision) laws in the 2002 financial year which would avail them of tax concessions for that year.  Justice Lindgren said that neither fund was a regulated fund because the ATO didn't receive relevant paper-work for Peter's fund until 2 September 2002 and for Helen's fund until 11 November 2002.

His Honour was not presented with any evidence to show that any financial or member accounts had been maintained by the trustee and therefore said that the value of the property had not been credited to the member's account.  He could therefore see no accounts showing any benefits paid out of either super fund.  Without knowing any facts these appear to be surprising administrative omissions.

It is unclear what the taxpayer's ultimate motivation was for implementing these transactions.  Presumably they wanted to contribute the property into the fund without personally paying CGT so that when it was sold for $4 million they would only be paying CGT at a 10% rate as opposed to a 24.5% rate.  At stake was a $400,000 tax saving.

This tax saving strategy failed when they lost this Court case.  They have also been ordered to pay the Tax Office's legal costs.

This case – Kafataris v Deputy Commissioner of Taxation [2008] 1454 – provides an excellent example in many aspects in how not to run super funds.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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