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Bryce Figot, special counsel for DBA Lawyers, said under paragraph 25 of the alert (TA2023/2), the ATO implies it is not just SMSFs to which penalties may apply if they operate outside the rules or property investment.

Paragraph 25 states:

“Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.”

“The ATO is casting a wide umbrella over this issue,” Mr Figot said.

“It has better visibility of the market as a whole and the algorithm it uses may have detected a number of funds that lodged a small amount of assets in year one which may have shot up in year two.

“Although this tax alert is about property the principles the ATO is using could apply to a lot of things.”

Mr Figot said a case in 2020 is a prime example of how these principles could be used in situations other than straight property acquisition.

“The case involved an SMSF that invested in a business that was not property development but repaired helicopter systems,” he said.

“The fund spent $200 to acquire shares but made a profit of more than $2.3 million. The member worked in the business and transactions were not done at arm’s length.”

Mr Figot said the alert is dealing with the issue of arm’s length investments and looking at what seem like nominal investments that generate big returns.

“People have to ask themselves how could an SMSF prove the investment was consistent with an arm’s length dealing and the taxpayer alert alludes to that in paragraph 18 in regards to ‘unsafe dealings’.”

Paragraph 18 of the alert states:

A view has been expressed that as long as the SMSF is not directly involved in any non-arm’s length dealing, the NALI provisions cannot apply. These views are not correct and have been addressed judicially. Non-arm’s length dealings by any party in respect of any step in relation to the scheme, can give rise to NALI as defined in section 295-550 of the ITAA 1997.

“Even if a super fund paid an arm’s length price for the shares to begin with that does not inoculate them from NALI. You have to look at all the dealings in the food chain.

“It’s a bit like falling out of a plane – it’s not the fall that kills you. In this case, it’s not the primary tax, but the fact that the Commissioner may well put on penalties and interest.

“It begs the question how can superfunds ever invest in property development? There are lots of Is to dot and Ts to cross.

“Paragraph 5 of the alert points out that even if an SMSF gets the initial purchase right, they are not inoculated from penalties.

“You have to make sure that every step along the way is at arm’s length.

“It is a timely warning for SMSFs to get their ducks in a row and not cut corners on things.”