As noted in part 1 of our articles on the application of the Bendel decision to the Superannuation Industry (Supervision) Act 1993 (SIS Act), in our view, it is likely that the Courts will apply the Bendel decision to the SIS Act, such that the expanded definition of loan in the SIS Act will apply to arrangements that involve the advancement of principal with an obligation to repay and that it will not apply to a mere creditor and debtor arrangement (like a UPE).

In this part 2 of the series we examine how this may play out in section 65 of the SIS Act.

Section 65 – prohibition on lending to members

Section 65 of the SIS Act prohibits a trustee of a regulated super fund from lending money of the fund or giving any other financial assistance using the resources of the fund, to any fund members or their relatives.

The term ‘lend’ is not defined in the SIS Act. The question arises as to whether the principle in Bendel can be applied in this context – specifically, whether the conferral of a UPE would cause an SMSF trustee to contravene section 65.

In the Commissioner’s view, ‘financial assistance’ under section 65 also includes indirect financial assistance. Paragraph 10 of SMSFR 2008/1 relevantly provides that:

Financial assistance can be indirectly given by an SMSF to a member or relative of a member if the SMSF enters into an arrangement with some other entity whereby SMSF resources are used to give financial assistance to a member or a relative of a member through that other entity.

The Commissioner goes on to provide the following example from paragraph 196:

Example 20 - loan to family company to facilitate loan from family company to members - financial assistance

196. Gwen and Marg are members and trustees of an SMSF. They are also equal shareholders in CleanPipes Pty Ltd which runs the family plumbing business.

197. As trustees of the SMSF, Gwen and Marg arrange for the SMSF to lend $250,000 to CleanPipes Pty Ltd at a commercial rate of interest with the capital to be repaid to the SMSF in 5 years.[141]

198. Shortly afterwards CleanPipes Pty Ltd provides financial assistance to Gwen and Marg by lending them $250,000 at a commercial rate of interest. Gwen and Marg apply the borrowed funds towards the purchase of an investment property.

199. Taking into account the fact that Gwen and Marg control both the SMSF and the company and that soon after the loan was made by the SMSF to the company, the company made a loan of the same amount to Gwen and Marg, it is reasonable to infer that SMSF resources have been used to fund the loan to Gwen and Marg. Therefore, financial assistance using SMSF resources has been indirectly provided to members of the SMSF. The arrangement therefore contravenes paragraph 65(1)(b).

200. Even if CleanPipes Pty Ltd were an unrelated company this arrangement would still contravene paragraph 65(1)(b) as it relies on, or is dependent upon, the resources of the SMSF to indirectly provide Gwen and Marg with financial assistance.

The Commissioner’s expansive view of section 65 has always been debatable given that section 65 does not expressly have an indirect application (as compared to sections 66(3) and 71(2)). In addition, the section makes clear that it applies to loans to members and relatives and not to entities.

However, the Bendel decision casts great doubt on the Commissioner’s view. In our view, the reasoning applied in Bendel limits this expansive interpretation of section 65. That is, financial assistance in section 65 should be limited to arrangements where there is an advancement of principal with an obligation to repay. Further, there is no indirect application of the prohibition.

That is, the prohibition under section 65(1)(b), to not give any other financial assistance using the resources of the fund to fund members or their relatives, is only included to ensure that loan like arrangements (that may not formally be loans) are caught.

For further information please contact:
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au