The question of whether the payment of dividends to a self-managed super fund from a private company was a non-arm’s length transaction involved more than a consideration of the relative amount of dividends paid. It also involved a consideration of how the shares were acquired.
The trustee of an SMSF has lost an appeal to the Administrative Appeals Tribunal over a tax ruling because the acquisition of shares in the fund involved non-arm’s length dealing.
In a recent ruling (GYBW and Commissioner of Taxation), the AAT has upheld an amended tax office assessment that applied a high marginal rate of tax and a penalty assessment to dividend income.
Mr and Mrs D were the directors of the trustee of the self-managed super fund, the D fund, and its sole members.
Mr D was a partner in an accountancy practice when, in 2006, he started providing accountancy services to a business that serviced Department of Defence helicopters and their landing systems.
In 2011 Mr D was planning to retire from the accounting practice and was offered the job of chief financial officer of the helicopter servicing business. He was offered a salary plus a 20 per cent share in the business.
Mr D sought advice about whether the trustee of the SMSF could acquire the shares in the business and whether that acquisition complied with superannuation rules.
The law firm advised that a trustee of a regulated superannuation fund was prohibited from intentionally acquiring an asset from a related party. It said Mr D could not be an employee of B Holdings or its subsidiaries at the time of the acquisition of the shares.
Mr D went ahead and arranged to have the trustee acquire the interest in the business, B Holdings.
He retired from his accountancy partnership in June 2012 and started work at B Holdings as CFO.
For the 2011/12 financial year Mr D’s fund received a dividend of $672,900 with franking credits of $288,283 from B Holdings. The fund received dividends of $1.05 million from B Holdings for the 2012/13 financial year and $70,000 for the 2014/15 year.
The ATO began a review of the fund in 2016 and the following year issued an amended assessment for the 2013,2014 and 2015 income years, concerning dividends and franking credits.
The ATO ruled that it was non-arm’s length income, taxable at the highest marginal rate. The ATO also applied a penalty assessment.
The trustee objected to the amended assessment and, when the ATO rejected the objection, it took its case to the Administrative Appeals tribunal.
Mr D argued before the AAT that the amount of the dividends paid by B Holdings to the fund was consistent with are arm’s length dealing.
However, the AAT said a consideration of NALI was not limited to a consideration of whether the dividends paid on the shares held by the fund were paid at the same rate as dividends paid to other shareholders. It also had to consider the “absolute quantum” of the dividend paid to the fund.
It pointed to precedent, where the Federal Court has ruled that dividend payments from a private company were non-arm’s length where a super fund had acquired shares in the company at a cost far less than their market value.
It said it was relevant to consider the circumstances in which the shares were acquired, and whether the trustee of the fund and the issuer of the shares were dealing at arm’s length when the shares were acquired.
The D fund acquired the B Holdings shares at a time when B Holdings had no assetsand the value of the shares was a nominal amount. But B Holdings wenton to acquire the shares of a company related to the business owner, which added considerable value.\
“Although the D fund trustee was not a party to the acquisition of BE Pty Ltd by B Holdings, the acquisition of those shares occurred as part of an arrangement by which a benefit was intended to be conferred on Mr D
“The subscription for shares by the trustee in B Holdinsg was related to Mr D’s engagement as an employee of the B Group.
“The Tribunal considers that this points to the amount of the dividends paid by B Holdings not being consistent with an arm’s length dealing.
“The source of the dividends paid by B Holdings cannot be divorced from a non-arm’s length transaction, being B Holdings’ acquisition of the shares of BE Pty Ltd.”