Evading tax and super laws by using unrelated trusts

The arrangement outlined in Taxpayer Alert 2010/5 is where a self-managed super fund (SMSF) invests funds in an unrelated trust and the trust then on-lends the funds to a member or relative of a member of that SMSF.

Under section 65 of the Superannuation Industry (Supervision) Act (SISA), SMSF trustees cannot lend or provide financial assistance to a member or a relative of a member using the resources of the fund. This includes an SMSF member receiving the funds of the SMSF indirectly, through what the organiser claims to be an 'unrelated' trust. Doing this is not in line with the super and tax laws.

By providing such indirect assistance, SMSF trustees may also potentially breach other regulatory requirements, such as whether the SMSF has been maintained for the sole purpose of providing retirement benefit for the members.

If an SMSF trustee breaches any of the regulatory rules, it may result in us making the fund non-complying. This is a very serious penalty, as it means the fund is subject to a 45% tax rate on the market value of assets at the start of the income year the fund becomes non-complying, less undeducted contributions. Fund trustees may also be liable for civil and criminal penalties.

Trustees also need to take care to ensure their investments in these types of trusts are secure and that they completely understand their rights under the loan agreements.

	Read Taxpayer Alert 2010/5.
	Self-managed superannuation fund ruling SMSFR 2008/1 provides guidance to SMSF trustees on the issue of giving financial assistance using the resources of an SMSF to a member or relative of a member.