Advisers and trustees have been warned to take into account wider compliance implications when assessing the Australian Taxation Office’s (ATO) decision regarding mortgaged assets in a self-managed superannuation fund (SMSF).
The ruling contained in ID 2011/81 legitimised the acquisition of an asset by an SMSF that had an existing charge over it as this situation differed from creating a charge over an asset of the fund.
Self-Managed Super Fund Professionals’ Association of Australia national technical director Peter Burgess said care had to be taken with acquiring mortgaged assets as a breach of the sole purpose test might arise.
For example, if an asset was being used as security for a personal loan to a member, the fund may be deemed to be providing current-day benefits to the member, a situation that would not satisfy the sole purpose test.
“Similarly, the arrangement could constitute providing financial assistance to a member in contravention of the rules. In a previous ruling, the ATO concluded that financial assistance can be provided using the resources of the SMSF even though there is no actual reduction in the assets of the SMSF,” Burgess said.
He also highlighted that if the SMSF purchased an asset that was mortgaged, the change in the legal title would usually result in the existing mortgage being extinguished with a new mortgage registered in the SMSF trustees’ names.
“The registration of the new mortgage could then be interpreted as the new owner [the SMSF trustee] giving a charge over an asset of the fund in breach of the rules,” he said.
“Putting aside the argument that a change in legal ownership may result in a new charge being created, in SPAA’s view, this ATO decision is only likely to apply in situations where an SMSF acquires an asset with an existing charge.
“There is clearly no personal benefit or financial assistance being provided to a member. This could arise in situations where a court, as a matter of law, has imposed a charge over an asset.”
