ATO raises alarm on asset protection scheme for SMSFs

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In a recent online update, the ATO said it is concerned about asset protection arrangements that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust, commonly referred to as a ‘Vestey Trust’.

The ATO explained that a Vestey Trust is a discretionary trust established by deed.

“It is claimed that the trust is set up to acquire the equity in the SMSF’s assets through an equitable mortgage,” the Tax Office stated.

“The equitable mortgage is supported by the execution of a promissory note by the SMSF to the Vestey Trust. This recognises a debt is owed by the SMSF to the Vestey Trust. The mortgage is also supported by a caveat by the Vestey Trust over the SMSF’s real property.”

The arrangement can also allow a transfer of the SMSF’s cash holdings to a bank account in the name of the Vestey Trust.

The ATO advised SMSF trustees that the arrangement is unnecessary because the super system already protects SMSF assets from creditors.

It also warned SMSFs that the arrangement is a compliance risk and may contravene one or more super laws.

“For example, it may result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee or involve the borrowing of money by the SMSF trustee,” the ATO cautioned.

“[It may also] expose fund assets to unnecessary risk if it’s not clear who owns them or cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.”

The ATO also reminded trustees that SMSF money cannot be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets because these expenses are not incurred in running the SMSF.

“If the arrangement contravenes the super laws, penalties may apply,” it cautioned.

The ATO is encouraging any trustees that have become involved in a scheme like this to make a voluntary disclosure.

“We will take this into account when determining our compliance action,” it said.

Miranda Brownlee
05 January 2023
smsfadviser.com