SMSFs – AAT decision confirms notice of non-compliance (Montgomery Wools)

On 6 February 2012 the Administrative Appeals Tribunal (AAT) handed down its decision in Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund v Commissioner of Taxation [2012] AATA 61.

The AAT confirmed the Commissioner’s notice of non-compliance for the SMSF because of activities by and with a pre-1999 unit trust wholly owned by the trustee of the SMSF.

The AAT found that the trustee of the SMSF:

1. provided financial accommodation (a potential breach of section 65 and the in-house asset rules) as:

(a) it had an unpaid entitlement from the related unit trust that it did not call; and

(b) the trustee of the related unit trust sold an asset and used the funds to repay a debt of a related family trust; and

2. also breached the sole purpose test as:

(a) the assets of the related unit trust were used as security for the debt of a related family trust;

(b) the trustee of the related unit trust made a loan to the trustee of a related family trust; and

(c) the trustee of the related unit trust sold an asset and used the funds to repay a debt of a related family trust.

Importantly, some of the actions that led to the non-compliance occurred because of the activities of the trustee of the related unit trust, and not the trustee of the fund directly. Also, the failure to call for payment of the unpaid entitlement from the related unit trust led to a compliance issue.

This is one of the first AAT decisions on some of these issues, and it will be important for advisers to be aware that dealings with and by wholly owned pre-1999 unit trusts may make a fund non-complying.