The ATO has issued an alert, warning taxpayers against entering arrangements where special purpose vehicles (SPVs) are used to divert profits of property development projects to SMSFs. Specifically, it is reviewing arrangements where one or more SMSFs have or acquire direct or indirect ownership of SPVs that undertake a property development project and due to non-arm’s length arrangements between the SPV and other entities, the SMSF ultimately derives more benefits than if the parties had dealt with these at arm’s length.
The taxpayer alert outlines the following features which these arrangements may typically display:
- controlling minds of one or more property development groups establish an SPV for a property development project;
- the controlling minds are members of their respective SMSFs and interests in the SPV can be directly or indirectly owned by these SMSFs acquired either by arm’s length or non-arm’s length prices;
- the SPV then contracts with related entities to carry out some or all of the property development work at a non-arm’s length price as a result the related entities end up deriving lower or even nil profit had the dealings been at arm’s length;
- the related entities and/or SPV may also enter into loans to facilitate the property development with the terms of the loans not consist with those dealing at arm’s length (eg interest rate may be lower, or loan terms may appear to be at arm’s length but are not followed or enforced);
- SPV earns higher profits from the property development than if all the parties were dealing at arm’s length and the SMSFs ultimately derives dividends or distributions in respect of the SPV profits and may receive tax offset refunds in relation to any dividends received.
According to the Commissioner, these non-arm’s length arrangements lack commerciality and have the effect of shifting profits that would normally be taxed at corporate rates to SMSFs which are taxed concessionally. It notes there is a view expressed by some that as long as the SMSF is not directly involved in any non-arm’s length dealing, the non-arm’s length income (NALI) provisions will not apply. The ATO strongly disputes this view and notes the correct interpretation, that non-arm’s length dealings by any party with respect of any step in relation to a scheme can give rise to NALI, has been addressed judicially.
As a part of its review, the ATO will be engaging with taxpayers that have entered into these schemes. It will consider whether dividends and franking credits received by SMSFs in these arrangements should be taxed at the top marginal rate. NALI consequences may also arise where the disposal of entities in the scheme give rise to capital gains or income that flows to SMSFs.
In addition to the above, the ATO notes the Commissioner may make a determination under Income Tax Assessment Act 1936 (Cth) Pt IVA (general anti-avoidance rule) in relation to the imputation benefit or tax benefits derived under these arrangements. It may also disqualify individuals from acting as trustees of SMSFs or from acting as directors of a corporate trustee of SMSFs. Notices of non-compliance may also be issued to SMSFs.
If you need help with any aspect of your SMSF including administration or specifically in relation to property development, contact us for help and advice. If you’ve inadvertently entered into a scheme similar to the outlined and are not sure whether the alert applies to you, we can also help.