It is easy to forget that income of a superannuation fund can be
taxed at the top tax rate, even if the fund is in pension
Beware the non-arm's length income rules!
Income earned by the trustee of a superannuation fund will be
non-arm's length income (formerly special income) if it is:
(a) a trust distribution and
the superannuation fund does not have a 'fixed entitlement'
to the income and capital of the trust; or
(b) as a result of a
non-arm's length dealing and the income is higher than what the
income would have been had the arrangement been at arm's
These rules have recently been considered by the Full Court of
the Federal Court in the case of Allen (Trustee), in the
matter of Allen's Asphalt Staff Superannuation Fund v
Commissioner of Taxation  FCAFC 118, in which the
ATO's assessment of income as special income was upheld.
In this case, a distribution of $2,500,000 was made:
(a) firstly from a hybrid trust
to a fixed trust; and then
(b) from the fixed trust to the
self-managed superannuation fund (which had a "fixed
entitlement" to the income and capital of the fixed
The Full Court of the Federal Court confirmed that the steps
undertaken by the trustee (Allen) in directing the trustee of the
hybrid trust, the trustee of the fixed trust and the trustee of the
superannuation fund resulted in the fund receiving the distribution
in question. The Full Court determined that this could be
'readily seen to be the consequence of an
"arrangement" to which the various trustees were
parties'. That arrangement led to a non-arm's length
The Full Court found this was the case even though the trustee
of the fund:
(a) may be a passive
participant in the arrangement or dealing;
(b) had no direct involvement
in the non-arm's length dealing.
As a result of the arrangement being non-arm's length, the
Full Court upheld the ATO's decision to tax the distribution to
the superannuation fund at top tax rates instead of 15%. The Full
Court did accept the taxpayer's argument was reasonably
arguable, so allowed their appeal on penalties.
The decision reinforces the need to take care when structuring
dealings involving a self-managed superannuation fund and
particularly ensuring all arrangements can be justified on
arm's length terms, even where the fund obtains only an
Cooper Grace Ward was named Best Australian Law Firm in the BRW
Client Choice Awards 2010 - Revenue < $50m. Joint Best
Australian Law Firm in the BRW Client Choice Awards 2009 - Revenue
The firm has also been named as the fastest growing law firm in
Australia for 2009 by The Australian.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).