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ATO dislikes two-fund strategy

The ATO has officially declared its dislike of running two SMSFs in conjunction with one another as a method by which to manage and comply with the newly imposed $1.6 million transfer balance cap in video content it has released with the SMSF Association.

“The two-fund strategy is where you set up two self-managed superannuation funds – one has 100 per cent in pension phase at $1.6 million, [while] the other one has all of the accumulation account money in it,” SMSF Association head of technical Peter Hogan explained at a recent breakfast seminar.

“The ATO doesn’t like it.”

Hogan said the ATO has flagged the potential for this strategy to be considered a tax avoidance measure under Part IVA of the Income Tax Assessment Act.

“Of course they can’t say if Part IVA will or won’t apply because that’s a circumstance-by-circumstance situation,” he noted.

He advised practitioners who are considering implementing this type of strategy for their clients to pay particular attention to documenting the reasoning behind it.

“If you are going to recommend that style of strategy to a client for any reason, make very clear what that reason is if it’s not tax,” he said.

“If it’s purely a tax reason then I would suggest you have a very good think about whether it is a good thing to recommend to your clients because the ATO has said very clearly if the only reason for doing it is for a tax benefit we will apply Part IVA to that arrangement.”

According to Hogan, the regulator has signalled its intention to ignore the fact there are two separate funds in these scenarios and treat both funds as a single fund and tax them accordingly.

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