The Tax Office is warning people to be cautious of arrangements being promoted that involve the sale of an inactive pre 1999 self-managed super fund (SMSF) with a related unit trust.

Under the arrangement, the promoter advertises the sale of a pre 1999 SMSF that has control of a related unit trust.

Typically, the advertising material states that the arrangement qualifies under the transitional provisions relating to the use of in-house assets and therefore provides taxation and superannuation regulatory benefits, including:

a) Allowing ownership of a residential property through the pre 1999 SMSF and gearing through a related unit trust, then leasing the property to a related party (e.g. a member of the SMSF), which would not otherwise be permitted for post 1999 SMSFs;

b) Deducting interest expense which may not be deductible to other parties (i.e. private or domestic expenses of a member of the SMSF, or expenses incurred in producing exempt income of the SMSF);

c) Reducing/avoiding potential capital gains tax through the lower taxes paid by the SMSF (i.e. on the property held through the unit trust), and;

d) Circumventing the superannuation regulatory restrictions (especially the in-house asset rules) that would result in the SMSF's income or capital gains being subject to higher rates of tax.

Some material even promotes that the arrangement is supported by a Tax Office view (such as ATOID 2002/388).

The Tax Office considers that such arrangements may be a form of tax avoidance and will be looking at them closely.

More information can be obtained from the Tax Office's Taxpayer Alert TA 2009/8 and Media Release