RSS feed for this section

Archive | Superannuation

Taking out tax when superannuation death benefits are paid to deceased estates and testamentary trusts

Confusion-Blue

Who pays tax and how much when a superannuation fund pays out death benefits to a deceased estate or to a testamentary trust is not intuitive. The two technical concepts of “dependant” and “taxable component” in particular are a source of confusion.

Dependant

There are two relevant kinds of dependant. The SIS Act kind of dependant (a spouse of the person, any child of the person and any person with whom the person has an interdependency relationship – section 10 of the Superannuation Industry (Supervision) Act 1993) notably differs from a death benefits dependant under section 302-195 of the Income Tax Assessment 1997 , a subset of (SIS Act) dependant, as a death benefits dependant excludes adult children who are not disabled or in an interdependency relationship. Such an independent adult child can be a (SIS Act) dependant in receipt of a death benefit from a superannuation fund but is not a (section 302-195 of the ITAA 1997) death benefits dependant.

Taxable component

For tax purposes a death benefit is split into a taxable component and a tax fee component. The tax free component is tax free to any dependant but the taxable component is a misnomer when paid to a death benefits dependant (DBD): it’s tax free too! So of the four permutations (tax free to DBD, tax free to Non-DBD, taxable to DBD, taxable to Non-DBD) it is when a death benefits dependant receives a death benefit comprising taxable component that the benefit becomes taxable.

Re-contribution

Superannuation benefits can be paid prior to death if a member has satisfied a condition of release such as reaching the age of 65 years. This can be a way of reducing the taxable component of a death benefit that might be taxable to a dependant when paid after the member’s death. Member benefits, viz. benefits withdrawn by a member during his or her lifetime, are generally not taxable to the member where the member has reached aged 60.  It is permissible to re-contribute withdrawn benefits as non-concessional contributions back into superannuation, which become tax free component, when later paid out by the superannuation fund as death benefits.

Non-concessional limits and caps on re-contribution

However the member must be within non-concessional contribution limits to re-contribute back into superannuation in this way. At over age 65 that involves meeting the work test and being within the non-concessional caps. That is being under:

  • annual non-concessional contributions of $100,000 p.a. (no bring forward allowed for over age 65s); and
  • a total superannuation balance of $1.6m.
A look at how a taxable death benefit is taxed

A payment of death benefit that flows to a beneficiary of a deceased estate is something of a three stage event. The tax system looks through to the ultimate dependant in receipt of the death benefit (the third stage) even though the trustee of the superannuation fund may simply be paying death benefits to the legal personal representative of the deceased member who is an allowable (SIS Act) dependant (the first stage).

Non-death benefits dependants only get lump sum death benefits

Only lump sum death benefits can be paid to a dependant who is not a death benefits dependant, such as an independent adult child, so ordinarily we are looking at tax at 15% on a “taxed element” (the usual source [element] of benefits from a SMSF) but other rates can apply: see this table of rates at the ATO website https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=12

A curiosity is that taxable lump sum death benefits received by the trustee of a deceased estate are not subject to the medicare levy. Taxable lump sum death benefits viz. taxable component received directly by a non-death benefits dependant from the trustee of a superannuation fund, that is, not indirectly from the fund via a legal personal representative deceased estate dependant, is subject to medicare levy and PAYG withholding.

No PAYG withholding on lump sum death benefit paid by the trustee of the superannuation fund

The ATO also confirms that a lump sum death benefit is not subject to PAYG withholding where it is paid to:

  • a death benefit dependant (tax free); or
  • the trustee of a deceased estate – this amount is taxed within the deceased estate broadly in the same way it would be taxed if it was paid directly to the beneficiary.

https://www.ato.gov.au/super/apra-regulated-funds/paying-benefits/taxation-of-super-benefits/?default

The trustee of the superannuation fund is obliged to provide a PAYG payment summary – superannuation lump sum form (NAT 70947) to the trustee of the deceased estate within fourteen days of the payment though.

Obligations of the trustee of the deceased estate

According to the 2018 trust tax return instructions at the ATO website https://www.ato.gov.au/forms/trust-tax-return-instructions-2018/?page=43

A superannuation death benefit paid to a trustee is taxed in the hands of the trustee in the same way that it would be taxed if paid directly to a beneficiary, that is, the portions of the payment are subject to tax to the extent the beneficiary is a dependant or a non-dependant of the deceased. There is no tax payable to the extent that the payment is made to dependants or eligible non-dependants of the deceased.

At stage two, the trustee returns the taxable portions applicable to the non death benefits dependants in the trust return so that the ATO can assess the tax payable by the trustee as if the estate beneficiary/non-death benefits dependant was being directly taxed (with the taxed element generally capped to 15%).

This tax is a final tax paid at the trustee of the deceased estate level so no tax at stage three! A trustee of deceased estate should not include taxable elements of a superannuation death benefit lump sum, otherwise returned and directly and finally taxed, in income in its tax return. Then these amounts will not be further taxed at stage three as income say of a resident adult beneficiary.

Minority SMSF investors and related unit trusts

AssociatesA popular pro-active SMSF strategy is to skirt the boundaries of the associate rules in Part 8 of the Superannuation Industry (Supervision) Act 1993 (SISA) with minority SMSF investors taking units in a unit trust with no apparent majority controller with other unrelated SMSF or non-SMSF investors. The object of the minority strategy is that the minority SMSF investor and associates have a less than 50% entitlement to income and capital of the unit trust and so the unit trust will not be a related trust of the SMSF automatically. This is an alternative strategy to investing in a non-geared unit trust which complies with Regulation 13.22C of the Superannuation Industry (Supervision) Regulations.

If the minority strategy doesn’t work

If the unit trust is, or becomes, a related trust of the SMSF the consequences can be severe. The investment in the related trust by the SMSF is taken to be an in-house asset. A SMSF that fails to remedy an investment of more than 5% of its assets in in-house assets faces loss of complying status potentially causing:

  • tax at 47% on its current income; and
  • loss of almost half of the assets of the SMSF in a one-off additional tax bill in the year in which the SMSF becomes non-complying; or
  • prosecution for civil or criminal breach of a civil penalty provision under the SISA.

An investment in a non-geared unit trust which complies with Regulation 13.22C is specifically excluded from being an in-house asset. The minority strategy does not give the same assurance to a SMSF investor in units in a unit trust which is not Regulation 13.22C compliant.

Control of a trust

The more  than 50% entitlement to income and capital test is one of the tests of control of a trust in sub-section 70E(2) of the SISA which determine whether or not a trust is controlled and is thus an associate and, by that, a related trust. An alternate test in paragraph 70E(2)(b), sometimes overlooked by users of the minority strategy, is the directions, instructions or wishes test which is an alternative test of control of a trust. Its formulation:

an entity controls a trust if:
…               (b)  the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts);

is based on a similar formulation in sub-section 318(6) of the Income Tax Assessment Act 1936 which deals with associates under the income tax controlled foreign corporations (CFC) rules.

MWYS v. Commissioner of Taxation

The directions, instructions or wishes test in paragraph 318(6)(b) in the CFC rules was recently considered by the Administrative Appeals Tribunal in MWYS v. Commissioner of Taxation [2017] AATA 3037 (22 December 2017) and the companies in dispute with the Commissioner in that case were found not to be associated even though the companies concerned had the same directors.

Deputy President Logan found that, despite the unanimity of the directors of the companies involved, the companies were not associates as it could not be concluded, on the evidence, that the directors of one company, acting in that capacity, would influence themselves acting in their capacity as directors of the other company. Deputy President Logan observed that the arrangements between the companies involved: an Australian listed company and a UK publicly listed company which enabled them to dual list on the ASX and the London Stock Exchange, were for the purpose of compliance with dual listing requirements but, within that framework, the companies were structured with similarity to unrelated joint venturers. No inference could be drawn about one company acting on the directions of the other.

Moreover the strict governance which applied to both of the listed companies actually helped the companies to establish that the directors were acting independently and at arms length from the other company even where the directors were directors of the other company too. Short of a sham, or a cipher, as arose in Bywater Investments Ltd v Federal Commissioner of Taxation [2016] HCA 45 (see our blog -Why setting up offshore companies for Australians is a tricky business), the AAT was prepared to rely on the meticulous corporate documents which set out the distinct responsibilities of the directors of the companies they separately served.

Directors in common

It is certainly clear from MWYS that commonality of directors of a company, or in the case of paragraph 70E(2)(b) of the SISA, commonality of directors of a corporate trustee is not enough, in itself, to amount to a reasonable expectation that one company will act in accordance with the directions, instructions or wishes of the other company or of a group including it.

Is MWYS good news for SMSFs using the minority strategy?

Is the decision in MWYS a relief to minority SMSF investors in unit trusts concerned about paragraph 70E(2)(b) of the SISA? Maybe not. Documents of SMSF trustees and of unit trusts, in which they invest, are far less likely to be as meticulous at keeping the affairs of entities being examined for control apart. A unit trust deed is more likely than, say, a joint venture arrangement to show that the trustee of a unit trust might act in accordance with the directions, instructions or wishes of a unitholder, albeit a minority unitholder.

Frequently, under unit trust deeds, minority unitholders have the right to vote on resolutions which bind the trustee of the unit trust to act. A minority unitholder may not have the votes, alone, to so bind the trustee; but the question posed by the test is whether the trustee is accustomed to act, or whether there is a reasonable expectation that the trustee of the unit trust will act, in accordance with the directions, instructions or wishes of a minority unitholder. The answer in fact is equivocal – yes, if the minority unitholder votes are in the majority and no, if not. So yes, a part of the time or on some occasions. So the minority SMSF investor and the trustee of the unit trust are associated?

What will facts show under scrutiny?

The concern for SMSF users of the minority strategy is: will their position, that the unit trust they invest in is not a related trust, become less defensible under scrutiny from the Commissioner? From the activities of the SMSF investor, its associates and the trustee of the unit trust the Commissioner can gauge how the trustee of the unit trust has reached decisions, which may not have been in accord with documents, whether sound or not, and form a view as to how likely the trustee of the unit trust is likely to have acted on directions, instructions or wishes of the SMSF investor and its associates.

Until the circumstances of a SMSF using a minority strategy, including the relevant documents, are considered it can be uncertain whether a SMSF minority unitholder may “control” a unit trust and cause it to be a related trust.

Aussiegolfa SMSF hits sole purpose flag

golfflagThe sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act), which requires that superannuation funds be conducted solely for core and ancillary purposes (superannuation purposes) with core purposes including:

  • funding for retirement from gainful employment of a member;
  • a member reaching a prescribed age; or
  • the death of a member,

is fundamental to the integrity of Australia’s tax-privileged and compulsory superannuation system.

The sole in sole purpose

In practice section 62 is a difficult provision to apply at the margin because of the ostensible purity of purpose of conduct of a superannuation fund to meet the sole purpose standard, or more precisely, a collection of allowed purposes.

Between commencement of the SIS Act in 1993 and December 2017 the meaning and scope of “sole” in the sole purpose test was not specifically considered in reported court cases.

The opening round

In Case 43/95, 1995 ATC 374 (the Swiss Chalet Case) the Administrative Appeals Tribunal considered whether a superannuation fund had met the sole purpose test where the fund had invested in:

  • shares which enabled access to a golf club for; and
  • a Swiss chalet which earned income for the family trust of:

the managing director of the employer-sponsor of the fund. The AAT found that the fund had been conducted for purposes other than superannuation purposes and thus the fund failed the sole purpose test.

The latest play

The Federal Court has now considered “sole” in the sole purpose test and referred, with approval, to the reasoning in the Swiss Chalet Case in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525. Given the significance of the golf club access of the managing director in the Swiss Chalet Case and the allusion to golf in the name of the trustee of the superannuation fund, one might think that the trustee was looking for the attention and the view of the Commissioner of Taxation, as the regulator of self managed superannuation funds, on the purposes of Aussiegolfa Pty Ltd.

A provisional ball?

Indeed, the facts in Aussiegolfa indicate the trustee sought to test whether residential properties held by self-managed superannuation funds could be used by related parties under the SIS Act.

Facts in Aussiegolfa

In Aussiegolfa the trustee was the trustee of the personal SMSF of the Victorian State Manager of DomaCom Australia Ltd., a managed investment scheme regulated by the Australian Securities and Investments Commission. The trustee of the SMSF and the family of the member of the SMSF invested in units in DomaCom which were directed to and funded investment by DomaCom in a student residential accommodation to be leased to the daughter of the member of the SMSF who was a university student. DomaCom was hopeful that they had initiated an effective and attractive SMSF investment strategy.

Investment in an in-house asset?

The first SIS Act hurdle for the SMSF trustee to overcome in Aussiegolfa was whether there was an investment in a related trust causing the investment to be an in-house asset to which section 82 of the SIS Act would apply (with or without a determination by the Commissioner that the investment was an in-house asset under sub-section 71(4) of the SIS Act).

The investment by the SMSF trustee was in units in DomaCom, a managed investment trust. The Federal Court worked its way through the terms of the constitution of DomaCom, and amendments of it, and a series of product disclosure statements to determine the basis on which the SMSF trustee had invested in DomaCom at the time of its investment. Pagone J. found that the trustee had invested in a sub-trust which was a discrete trust and so a related trust of the SMSF for SIS Act purposes.

Not out of bounds

That finding was despite equivocal provisions in the applicable terms of the constitution of DomaCom which sought to reinforce, unsuccessfully to Pagone J., that the units in DomaCom did not give a unit holder, whose investment had been directed to certain assets and whose income and entitlements were ring-fenced to those assets, an interest in those particular assets and that DomaCom was one indivisible trust of many assets.

It followed from this framing of what was the trust by the Federal Court that the SMSF trustee could not rely on the widely held unit trust exclusion in paragraph 71(1)(h) of the SIS Act from being a related trust and an in-house asset.

… and hitting the sole purpose red flag

Turning to the sole purpose issue, Pagone J. accepted the reasoning in the Swiss Chalet Case and applied authority which explains how a “sole” purpose requirement is to be interpreted and applied. Broadly, Pagone J. concluded that:

  • the inquiry into sole purpose is a question of fact;
  • the inquiry is not an inquiry into motive but into the “end sought to be accomplished”;
  • the sole purpose requirement precludes there being any other purpose , however minor; and
  • there may be facts which could suggest pursuit of other purposes, if those facts were considered separately, but these do not necessarily connote other purposes if they show pursuit for the required sole purpose.

In Aussiegolfa Pagone J. held that providing housing to the daughter of the member of the SMSF was not within and inconsistent with superannuation purposes and so the SMSF failed the sole purpose test.

A two shot penalty

The trustee of the SMSF in Aussiegolfa had hoped that its investment in units in DomaCom would not jeopardise its status as a complying superannuation fund. But due to the decision of the Federal Court:

  • the units are an in-house asset comprising more than 5% of the assets of the SMSF so section 82 can be applied to deprive the SMSF of complying superannuation fund status if the level of the in-house assets of the SMSF is not brought to 5% or under before the end of the income year following the income year of acquisition of the in-house asset; and
  • the SMSF can be made non-complying because it has failed the sole purpose test in section 62;

and various other civil and criminal penalties can potentially be applied for both of the SMSF’s breaches of the SIS Act by the Commissioner of Taxation.

An uncertain lie in the rough?

Pagone J. observed in Aussiegolfa that there may be circumstances where a lease to a related party would not breach the sole purpose test but, in Aussiegolfa, he observed that the evidence was that the purpose of the investment through DomaCom was, in part, for another purpose of providing housing to the daughter of the member of the SMSF. This is not a complete reassurance to other SMSFs that invest in business real property to lease to a related party. That investment can be excluded from being an in house asset under paragraph 71(1)(g) of the SIS Act but does it follow that the investment is in the circumstances which would not breach the sole purpose test Pagone J. describes? Can we safely infer that an investment that attracts a statutory exclusion from being an in-house asset should be excluded from failing the sole purpose test too?

Checking my card

I have paraphrased particularly in describing how Pagone J. applied the sole purpose test. I also take responsibility for the golfing headings through this post which I appreciate will be vague and wearisome to those lucky enough to be non-golfers.

SMSFs getting practical to invest in land with others

The force of the superannuation law is that investment in land by a SMSF needs to be prudent. An investment needs to be considered in a business-like way.

Limited recourse borrowing is one way to fund investment in real estate. SMSF principals may prefer to arrange equity investment from private connections outside of the SMSF.

Investment as a tenant-in-common?

I am frequently asked about SMSFs participating in land investments as a tenant-in-common with related and unrelated entities of the principals of the SMSF. It is apparent from the NTLG Superannuation sub-committee technical minutes of June 2011, released by the Australian Taxation Office, that tenants in common arrangements for SMSFs are not going to be prudent for the SMSF without careful and restrictive implementation. Wherever other tenants in common could borrow, or use or risk their interest as security, the SMSF tenant-in-common is exposed to uncontrolled risks which would bring into question, for instance, whether the SMSF:

1.    has acted prudently pursuing the investment for members for whom it is bound to provide;

2.    has breached regulations which prevent charges, or the potential for them, being taken over SMSF property; or

3.    has satisfied the sole purpose test.

Investment through a trust?

The tenant-in-common option is frequently turned to because of the restrictive regime that has applied in relation to the investment by SMSFs in related trusts since 1999. Shortly stated, a post 1999 investment by a SMSF in a trust, which is related to the principals of the SMSF, a “related trust”, is treated as an “in-house asset” and more than 5% of the assets of a SMSF in in-house assets can leave the SMSF non-complying.

Non-geared unit trust – expressly relieved from being a related trust

The SIS Regulations provide an express exception. A superannuation fund can invest in a non-geared unit trust (NGUT) to which Regulation 13.22C applies without the NGUT being taken to be a “related trust” and thus the investment isn’t taken to be an investment in an “in-house asset”.

This express exception is especially limited and, aside from relief from “related trust” treatment causing in-house asset difficulty, offers no expansion in the kind of investment that can be pursued with superannuation money. In other words, the investment still needs to address 1 to 3 above, for instance.

The Regulation 13.22C and 13.22D requirements and restrictions on NGUTs essentially mirror the restrictions on regulated superannuation funds. NGUTs cannot borrow and they can only “lend” to operate a bank account. They cannot secure or charge their assets. (A non-SMSF unit holder in a NGUT could give a security over his, her or its units but security could not be given over the assets of the NGUT.) A NGUT cannot run a business – unlike with superannuation funds, this is a direct requirement. Loss of NGUT status, so that the NGUT becomes a related trust triggering in-house asset difficulties follows the merest breach under Regulation 13.22D which can put complying status of a SMSF investor at the mercy of the ATO.

Practicalities

1.    Nevertheless a carefully implemented NGUT can be the most practical way to pursue unitised investment in land by related parties and unrelated parties of a SMSF with the SMSF.

2.    Compliance with the regulations needs to be closely monitored as stated. Any debtor or creditor, aside from a bank for the (credit only) trust bank account, potentially causes loss of protection from related trust status. Funding of, and money flow to and from, the NGUT without breaching the rules is thus practically challenging. The trustee needs to raise equity (unit) funding whenever any extra funding is required. From a practical and paperwork burden perspective, using partly-paid units is a strategy that might be considered wherever the trust needs a flexible equity facility.

3.    The activity of the NGUT that invests in land also needs to be monitored and carefully planned and structured. It is possible for real estate activity by trustees to be considered the carrying on of a business under tax rules. As stated a NGUT cannot carry on a business under the NGUT regulations nor, if it has a trust deed to suit, under its trust deed.

4.    Under the special trust rules in NSW, a special trust pays land tax at the highest land tax rate without a threshold. A SMSF can attract a better land tax rate. A NGUT will not automatically qualify for the rate for a SMSF to the extent a SMSF invests in it. However if the NGUT is a “fixed trust” under the land tax rules then a better rate than the special trust rate can be achieved. Hence there can be advantage to structuring a NGUT with a trust deed so that the NGUT can be treated as a fixed trust under the land tax rules.

5.    A carefully crafted trust deed can be very useful to assist the trustees of a SMSF and a NGUT to keep within the express requirements and restrictions on NGUTs.

Can I have the real estate in my SMSF?

Real estate can be provided in kind to a member as a superannuation benefit. Prohibitions can apply to acquisitions of real estate from members but this prohibition does not apply going the other way. That is: from a fund to a member on a payment out of the fund as a superannuation benefit.

Still a condition of release needs to be met before a superannuation benefit is provided by a SMSF. Let us say that the fund is in pension mode and the member is over the age of sixty-five so a condition of release is met for a benefit to come from the member’s superannuation balance in the fund to the member.

Difficulties providing a real estate benefit from a SMSF in an income stream

A SMSF in pension mode must face these difficulties before releasing a benefit in the form of real estate:

  • the Australian Taxation Office (ATO), if not the superannuation laws unequivocally, require that a pension (a superannuation income stream) benefit must be paid in money and not in kind;
  • the benefit can take the SMSF out of pension mode, where the income of the SMSF is tax exempt on its earnings; and in to accumulation mode, where the fund is taxable at 15% on its earnings; depending on how the commutation of pension is done. This could inadvertently cause the capital gain, the SMSF makes on the disposal of the real estate as a benefit, to be taxable to the SMSF; and
  • the SMSF may not have paid a minimum annual pension payment for the year as required by the superannuation income stream regulations.

Partial commutation solution

A partial commutation of a pension is a work around for these difficulties. A partial commutation of a pension is a commutation of less than the member’s pension balance in the fund as a lump sum. That is the member needs to have remaining member pension balance after the commutation. The ATO has indicated that a partial commutation:

Doing it

There are a number of traps to implementing this solution:

  • The governing rules of the SMSF must allow for partial commutations of pensions, the trustee must have a power under the governing rules to pay benefits in kind and the pension arrangements or agreement with the member must reflect this.
  • The member needs to trigger the partial commutation and the benefit in kind in accordance with the pension arrangements or agreement.
  • The trustee of the SMSF must value the real estate to ascertain the amount of the lump sum benefit being paid to debit to the member’s account.
  • The member getting the real estate benefit must have a sufficient member account balance remaining after the debit to treat the satisfaction of the benefit in kind as a partial commutation of the pension.
  • The fund and conveyancing documentation needs to be prepared on an arms length basis as required under superannuation law.

Although there is no capital gains tax if the fund remains exempt from tax in pension mode, other taxes and duties on a transfer of real estate can still apply.

For instance:

  • GST can apply to the transfer of commercial premises or new residential premises from a SMSF where the fund is registered or is required to be registered for GST.
  • Stamp duty liabilities vary significantly from state to state. Victoria has concessions on the transfer of dutiable property to a beneficiary of a trust. In New South Wales there is generally no relief from full ad valorem duty. A concession which applies in New South Wales on the transfer of dutiable property to a superannuation fund as a contribution does not apply to a transfer out the other way as a benefit.

Thus, to recap our disclaimer, partial commutation of a pension to provide real estate from a SMSF should be considered case by case and specific advice should be taken in relation to the above general comments.

Is a transfer to a SMSF by a related holding trust, after repayment of a LRBA to purchase residential property, prohibited by s66 of SISA?

Is a transfer to a SMSF by the trustee of a holding trust, who happens to be a related party of the SMSF, after repayment of the borrowing under a limited recourse borrowing arrangement – LRBA, to purchase residential property, prohibited by section 66 of the Superannuation Industry (Supervision) Act 1993 (“SISA”)?

Section 66 of the SISA prohibits a SMSF from acquiring residential property, which is not business real property, from a related party of the fund.

Returning an asset that is already in the SMSF

A similar question arises when a SMSF receives a return of an asset of the fund from a custodian or an investment manager, which incidentally happens to be a related party, which is similarly not covered by any exemption in section 66. Technically the SMSF has acquired the asset from a related party; the legislation could be clearer providing exceptions in section 66 for these cases especially as the scope of acquisition prohibited by section 66 is expressed in very wide terms: see paragraphs 88 to 109 of SMSFR 2010/1.

But an acquisition, being the return or resumption of the asset, not for consideration (value) from a related party, does not really explain the actual transaction happening. In these cases, the SMSF is acquiring or resuming title or legal ownership of an asset it already owns beneficially. So, in the case of a LRBA of residential premises, section 66 would be concerned with who the residential property was originally acquired from, not with the” acquisition” of the asset from the related holding trust once the borrowing is paid out.

As with a custodian or investment manager, the power of the related bare trustee of a holding trust to hold the asset, and the power to transfer the asset back to the trustee of the SMSF, is stated or is implicit in the SISA itself – see sections 67A and 123.  As a matter of statutory interpretation those powers should prevail over the prohibition in sub-section 66(1): generalia specialibus non derogant   Nevertheless a clearer description of the scope of the acquiring prohibited, and of exceptions, would be preferable to relying on that maxim though SMSFR 2010/1 issued by the Commissioner of Taxation does helpfully state at paragraph 113:

It is therefore necessary to take a holistic approach to the transaction to determine objectively what it is that the trustee or investment manager is actually acquiring. If, for example, something is being purchased by a trustee or investment manager, a relevant question is what is the trustee or investment manager paying money to acquire. While many transactions involve rights, an acquisition is of rights only if the substance of the transaction is rights.

What is the whole LRBA really about?

From a holistic viewpoint the SMSF, which already holds beneficial ownership of the residential property, is, in substance, concluding the acquisition from the original vendor by taking legal title to the residential property by the transfer from the holding trust. It follows that the acquisition of legal title from the related holding trustee is the exercise of a right to acquire legal title which is not the “substance of the transaction”.

The Australian Taxation Office may not necessarily take the same view.