Saturday, 2 June 2012

What is Section 66 ? Why should I be worried.....



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Source: Australia Tax Office



Section 66 relates to Superannuation Funds.


Section 66 of the SIS Act generally prohibits the acquisition of assets from related parties of the fund, with limited exceptions.
In respect of residential property, there are no relevant exceptions, and so whether or not there is a breach will turn on whether or not the acquisition is, or is not, an acquisition from a related party of the fund.
Assuming the fund has no standard employer sponsor the only possible related parties are the member and his Part 8 Associates.

link: http://www.ato.gov.au/taxprofessionals/content.aspx?menuid=0&doc=/content/00318255.htm&page=11&H11


from 

Superannuation Technical minutes, March 2012

source :ATO



7.2 The application of section 66 of the Superannuation Industry (Supervision) Act 1993 in the acquiring of assets from a deceased's estate

Issue raised
  1. Whether or not there is a breach of section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), if a SMSF purchases residential property from the estate of a member's deceased uncle.
If the uncle were still alive, the acquisition would be prohibited on the basis that the uncle (being a relative [as defined in section 10 of the SIS Act] of a fund member) would be a Part 8 Associate of the member.
However, the acquisition is from the deceased uncle's estate.
Industry view / suggested treatment provided by member
Estate assets are held on trust by executors pending distribution to beneficiaries.
Hence this question turns on whether or not the executors as the trustees of a trust which is controlled by a group in relation to the member (subsections 70B(e) and 70E(2) of the SIS Act) - ie, the member and his Part 8 Associates acting together or individually.
If the 'group' do control the deceased's trust estate, then each trustee/executor of the deceased estate will be a Part 8 Associate of the member under para (e) of the definition of Part 8 Associates of individuals (see above), and hence the acquisition will be prohibited by section 66 of the SIS Act. Otherwise the acquisition will not be prohibited by section 66.
It would appear that the trust could be controlled by such a 'group' if:
  • the member and/or Part 8 Associates were the sole executors of the deceased's estate;
  • the member and/or Part 8 Associates were executors jointly with other parties that are not Part 8 Associates but the executors as a group were 'accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of [the] group' [subsection 70E(2) of the SIS Act]. In situations where executors are to act jointly, this would be unusual;
  • the member and his Part 8 Associates were entitled to more than 50% of the income or capital from the deceased estate.
Equally, however, if the executors were parties unrelated to the member, the purchase would not be an acquisition from a related party and would therefore be permitted.


SO WHAT IS THE OUTCOME?
Subsection 66(1) of the SIS Act prohibits a trustee or investment manager of an SMSF from intentionally acquiring assets (other than money) from a 'related party' of the SMSF, subject to limited exceptions. For the purposes of this answer it is assumed that none of these exceptions apply. Therefore, whether the acquisition of the residential property by the trustee or investment manager of an SMSF, from the estate of a deceased uncle of a member of the SMSF, is prohibited under subsection 66(1) of the SIS Act will depend on whether an executor of the deceased estate is a 'related party' of the SMSF.



BELOW relates to Same rule 66. thanks Joan....




At the December 2011 meeting of the National Tax Liaison Group Superannuation Technical Sub-Group (NTLG), SPAA sought clarification on the application of section 66 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) which prohibits the acquisition of certain assets from members of a regulated superannuation fund. Specifically clarification was sought in situations where an SMSF constructs a property using goods and materials supplied by a related party.
The questions submitted by SPAA to the NTLG were as follows:
  1. Will the trustees of an SMSF breach section 66 of the SIS Act if the trustees appoint as their agent, a related party to purchase the goods and materials on behalf of the trustees and those goods and materials are used in the construction of a building on land owned by the SMSF?


  2. Will the trustees of an SMSF breach section 66 of the SIS Act if the trustees execute a deed of bare trust and transfer funds from the SMSF to the bare trust to finance the purchase of goods and materials used by a related party in the construction of a building on land owned by the SMSF? 

    Background
    The construction of a building requires the performance of a service (in this case by a related party) and the use of goods and materials to construct the premise. As part of the professional services provided by a builder, it is common practice for builders to provide the goods and materials necessary to construct the premise. It would be unusual, and in most cases impractical, for the consumer (in this case the SMSF) to purchase the goods and materials required to construct the premise directly from the supplier. Indeed, given trade discounts, it could be to the financial disadvantage of the SMSF if it did purchase the goods and materials directly.
    In February 2010, the ATO released ruling SMSFR 2010/1 which explains when an asset is intentionally acquired by a trustee of a SMSF from a related party for the purposes of subsection 66(1) of the SIS Act. This ruling covers situations where an SMSF enters into a contract with a related party entitling the SMSF to the performance of a service by the related party.
    The ruling says that the trustees of an SMSF will be in breach of section 66 if goods or materials used in the construction of the premise are provided to the SMSF by the related party builder.
    In 2011, the NTLG confirmed this view and said in cases where an SMSF engages a related party to construct a building on land owned by the SMSF, it must be clear that the related party is only providing building services and not any materials used if a breach of section 66 is to be avoided.
    However, it is unclear in SMSFR 2010/1 whether the trustees of an SMSF would breach section 66 of the SIS Act if the trustees appoint as their agent, a related party to purchase goods and materials on their behalf and those goods and materials are used in the construction of a building on land owned by the SMSF. It is also unclear in SMSFR 2010/1, whether the payment of the building materials out of a bank account which is held by the related party on bare trust for the SMSF will breach section 66 of the SIS Act. The latter may be preferred by the SMSF trustees as a way of securing trade discounts. It may also be preferred by sub- contractors wanting to transact directly with the builder rather then the SMSF trustees 




    ATO response
    In the ATO’s view, where a related party builder only acts as an agent, arranging for the acquisition of building materials on behalf of the SMSF trustee from an unrelated vendor, and the related party at no times holds legal title to the building materials, the SMSF trustee have acquired the materials from that vendor, not the related party. Therefore, section 66 of the SIS Act would not apply to the acquisitions and there would be no breach.
    Normal laws of contract and agency are applied to the facts of each case to determine whether the particular arrangements under which the building materials are supplied do amount to a direct acquisition by the SMSF trustee, with the related party only acting as an agent.
    However, the ATO also said that the following scenarios should be avoided as they might be indicative of the materials being purchased by the related party in their own right and on-sold to the SMSF trustee rather than a purchase by the SMSF trustee through the related party as agent:


    •   The related party pays for building materials and invoices the SMSF either progressively or at the end of the project, especially where a mark-up or profit is added.
    •   The related party builder claims GST input tax credits in respect of the acquisition of the building materials.
      In response to the question about a bank account being opened in the name of the related builder on bare trust for the SMSF, the ATO said that the payment for the building materials out of a bank account which is held by the related party on bare trust for the SMSF will not contravene section 66 of the SIS Act. The application of section 66 depends on whether the related party acquires the building materials in their own right which are then supplied to the SMSF trustee.
      Implications for practitioners
      In situations where SMSF trustees enter into a contract with a related party entitling the SMSF to the performance of a service by the related party, and the goods and materials provided by the related party as part of the service are not insignificant in value or function, care needs to be taken to avoid potential breaches of section 66 of the SIS Act.
      In these circumstances, consideration should be given to appointing the related party as an agent of the trustee. The appointment of the related party builder as an agent of the trustee in these circumstances would typically involve the SMSF trustee appointing the related party as their agent under a deed of agency agreement, or by a variation to the building contract.
      The deed of agency agreement would confer upon the agent the terms of the agency and would authorise the related party to acquire the goods and materials as an agent on behalf of the trustees. Alternatively, the agency appointment, and the authority to act conferred upon the agent, could be expressed or implied in the building contract.
      Consideration could also be given to opening a bank account in the name of the related party builder and the builder executing a deed of bare trust confirming that it holds the bank account on bare trust for the SMSF trustee. This may be particularly important in situations where trade discounts are at risk or sub-contractors are involved.
      If a bank account is opened in the name of the related party builder, the deed of bare trust should confirm that the related party builder holds the bank account on bare trust for the SMSF trustee and that all things purchased with the bank account proceeds belong to the SMSF. Funds can then be transferred from the SMSF


    © SMSF Professionals’ Association of Australia – Technically Speaking Updates

    to the bank account and used by the related party builder to purchase building supplies as directed by the SMSF trustee.
    Engaging related party builders to provide goods and materials to an SMSF is not an uncommon occurrence. Knowing what to do in these circumstances to avoid potential compliance breaches requires a good understanding of the SIS Act. It also provides a very good illustration of the value and importance of an SMSF specialist advisor.


    Changes to the NSW Duties and Land Tax Acts
    As a result of recent amendments to the NSW Duties Act 7, the duty concession that applies to transfers to SMSFs in NSW now applies to such funds even if the ATO is yet to confirm the complying fund status of the fund. However, this concession only applies if the trustee of the fund is satisfied the fund will be so confirmed. The Chief Commissioner of NSW State Revenue is now also able to reassess the duty payable in relation to a transfer if he or she is satisfied the fund was not a complying fund when the liability for the duty arose.
    A recent amendment has also been made to the NSW Land Tax Management Act to ensure that complying SMSFs will not be treated as special trusts for land tax purposes. This means SMSFs in NSW which satisfy the requirements of section 42(1) of the SIS Act (i.e. the fund is classified as a complying superannuation fund) are eligible for the tax-free threshold on taxable land.