This article examines the query of whether having a second or, indeed even more than two, self managed superannuation funds ('SMSFs') would give rise to a Part IVA (of the Income Tax Assessment Act 1936
(Cth) ('ITAA36')) risk.
Please note that this article is not intended to be a technical analysis of the application of Part IVA but reviews one potential issue in relation to SMSFs that has recently arisen.
The topic of this article was prompted following the ATO's press coverage in April 2017 that a second SMSF may give rise to Part IVA and other regulatory concerns where an ATO spokesperson was quoted as follows (Sally Patten, 'Multiple SMSF strategy may prove illegal', The Australian Financial Review, 24 April 2017, 5):
the ATO cautioned that it would take a dim view of trustees who set up a second fund to reduce their tax bill. 'This type of activity will attract close scrutiny from the ATO. We are concerned about any activity or behaviour undertaken in response to the superannuation changes where the dominant purpose appears to be to create a more tax beneficial outcome for an SMSF or its members,' an ATO spokesperson said.
'Considering the additional administrative costs and processes associated with establishing a separate SMSF and transferring selected assets from an existing SMSF to a newly established SMSF, together with the ongoing costs of maintaining an additional SMSF, prima facie there does not appear to be any explicable reason for doing so other than for the purpose of creating a more beneficial tax outcome under the superannuation new measures that come into effect on 1 July 2017,' the spokesman said.
Funds that fall foul of the law could be required to pay a penalty in addition to repaying the tax shortfall from the strategy. The Tax Office said it would also consider whether trustees had breached the so-called sole purpose test, which ensures that super funds are maintained for the purpose of providing benefits to its members on their retirement. Contravening the sole purpose test can lead to a series of sanctions, including a fund being disqualified.