ATO Issues Taxpayer Alert Shelf SMSFs with attached Pre 11 August 1999 Unit Trusts

The ATO has just released a Taxpayer Alert (TA 2009/8 Issued 17 April 2009) – which express the ATO’s concerns as to sale of shelf SMSFs which have attached Pre 11 August 1999 unit trusts.

The Alert describes arrangements where shelf SMSFs own units in a pre 11 August 1999 unit trust where the SMSF is being offered for sale in order to gain access to a Pre 11 August 1999 unit trust.

A shelf SMSF is an SMSF which has been established, registered and seeded at the time of establishment with a nominal amount.  Generally no further contributions would have been made and the only investment would be cash and the units in the attached Pre 11 August 1999 unit trust.

Presumably the units issued in the Pre 11 August 1999 unit trust consists of partly paid units and only minimally paid up.

The commercial advantage of purchasing such an SMSF is the ability to capitalise the unit trust by paying the unpaid amounts on the partly paid units and, if such capitalisation occurs before 1 July 2009, the capital of the unit trust can, post 30 June 2009, be invested without regard to the SIS Act investment rules. (Any amounts invested in such a unit trust after 30 June 2009 would be counted as in house assets).

The concerns of the ATO are that such arrangements are marketed on the basis that favour regulatory and taxation advantages (such as the ability to gear the Pre August 1999 unit trust, buy a residential property and lease the property to a member of the SMSF who owns the unit trust).

The ATO is also concerned that the marketers of such arrangements are claiming that ATO ID 2002/388 supports their position.  (ATO ID 2002/388 deals with a situation where a member of an SMSF leases property from a unit trust controlled by the SMSF where the unit trust is a Pre 11 August 1999 unit trust.)

The ATO in the Alert, suggest that such arrangements may not provide the alleged benefits and will be examining such arrangements.

The concern of the ATO is that such arrangements may fall down on the basis that the shelf SMSF is not a genuine SMSF (as it is not being maintained for authorised purposes – given the lack of contributions and investment activity) and may fall within the anti-avoidance provision of the in-house asset rules.

Super Investors considering entering into such arrangements should seek their own expert superannuation and taxation advice and should be mindful of the additional ATO interest in such arrangements.