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ATO cautions SMSFs in business succession
A specialist financial services lawyer has pointed to a recent ATO Interpretative Decision as having sounded a warning to Self Managed Superannuation Fund (SMSF) trustees.
Townsends Lawyers specialist, Michael Hallinan pointed to the Interpretive Decision (ATO ID 2015/10 – 1 May 2015) as sounding a warning to those who have sought to use SMSFs as facilitative mechanism within business succession agreements.
In doing so, he questioned whether the same rules would be applied to Australian Prudential Regulation Authority-regulated funds.
Hallinan said the form of the agreement in question was that business co-owners who enter into an agreement with each other and the trustee of their SMSF that they will make contributions to the SMSF (of a certain amount which is sufficient to finance life insurance on their lives) and the SMSF undertaking to effect life insurance on each member for an amount agreed to be the value of the member's interest in the business.
The arrangement meant that, on the death of the member, the insurance proceeds were collected by the SMSF, allocated to the death benefit of the member and paid out as a death benefit to the spouse of the deceased member, and that in exchange for the payment of the death benefit to the spouse the surviving member obtains the interest of the deceased member in the business.
Hallinan said the ATO considered that this arrangement failed the sole purpose test and also contravened the financial assistance prohibition.
"While it is always easier to be intelligent in hindsight, involving the SMSF trustee as a party to the succession agreement was probably not a good move," he said.
"The terms of the SMSF could have been amended to confer on the member the ability to direct the trustee to provide risk cover of a certain level. If so, the involvement of the SMSF trustee would have been reduced to simply providing a death benefit of an amount specified by the member which was financed by contributions made by or in respect of the member."
Hallinan questioned whether if, instead of using their SMSF, the two brothers had joined an APRA regulated fund and requested risk only death benefits, the APRA regulated fund would have contravened the sole purpose test and the financial assistance prohibition.
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