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Sladen Snippet - Bendel and SMSFs – Part 4–Bendel and UPEs owing to SMSFs

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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.

In this part 4 of the series we examine how this may apply to unpaid present entitlements (UPEs) owing from a unit trust to a self managed superannuation fund (SMSF) under the SIS Act.

UPEs as loans

Under the Commissioner’s view in SMSFR 2009/3, where that SMSF unitholder has a UPE, the SMSF gives financial accommodation to the unit trust by not demanding payment of the UPE. For example,  paragraph 7 of SMSFR 2009/3 states that:

It is the Commissioner’s view that, when an overall consideration of the factors surrounding the non-payment of the trust distribution is seen as an arrangement for the provision of credit or financial accommodation, it will satisfy the extended definition of ‘loan’ in subsection 10(1).

Further, paragraph 101 lists a number of factors which, in the Commissioner’s view, might lead to the conclusion that an arrangement for the provision of credit or financial accommodation does exist:

  • the trustees of the SMSF and the trustee of the trust being the same or under substantially the same control;

  • failure by the trustee of a trust to allocate funds for payment of distributions;

  • large amounts of unpaid trust distribution or multiple years of unpaid distributions; and

  • any documents executed by the parties which show an intention to defer payment of trust distribution.

This can be contrasted with Bendel, which established that factors such as a common trustee and a failure by the trustee of the trust to set aside the funds for payment of distributions, are not indicative of a UPE being a ‘loan’ under ITAA36, when there is no obligation to repay.

The Bendel decision casts great doubt on the Commissioner’s view. In our view, the reasoning applied in Bendel limits this expansive interpretation of loan. That is, the provision of credit or financial accommodation do not apply to UPEs (being debtor/creditor arrangements), and the expanded definition of loan should be limited to arrangements that there is an advancement of principal with an obligation to repay. 

UPEs as investments

In SMSFR 2009/3, the Commissioner considers that a UPE is an asset of an SMSF, and where the circumstances are such that the UPE constitutes an arrangement for the provision of credit or financial accommodation (i.e. a ‘loan’ under the extended definition), then that will be an application of that asset.

Where the application of that asset is for income, interest, profit or gain (for example, where interest is earned on the outstanding amount), this will, in the Commissioner’s view, constitute an investment by the SMSF in the unit trust. Where the unit trust is a related trust of the SMSF, that ‘investment’ will therefore be an in-house asset of the SMSF under section 71(1).

In our view, a ‘standard’ UPE (ie, where the parties have not documented or characterised the UPE as a loan or other arrangement) is not an investment under the SIS Act. The UPE does not grant the SMSF any rights you would expect of an investor, such as rights to income or capital or voting rights. It merely grants the SMSF rights as a creditor.

Is that the end of the story?

It should be noted that while a UPE may not be an in-house asset, other provisions of the superannuation laws would still need to be considered such as section 109 of the SIS Act and the non-arm’s length income rules.

It should also be noted that, at the time of writing, the ATO had made an application to the Hight Court for special leave to appeal the decision.

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

Phil Broderick