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NSW Duty Case - on transfer of dutiable property between super funds

28/03/2019

A NSW taxpayer has obtained a remarkable victory over the NSW Office of State Revenue (OSR) in a land transfer duty case.  The decision is Nifuno Pty Ltd atf Stephen Forbes Pension Fund v Chief Commissioner of State Revenue [2019] NSWCATOD 3.

The taxpayer was the sole member of an SMSF.  As a result of the introduction of the transfer balance cap from 1 July 2017, the taxpayer decided to implement a two fund strategy: one SMSF being the accumulation fund and the other SMSF being the pension fund.  The taxpayer established a second SMSF which was to act as the pension fund and transferred from the existing SMSF assets (including NSW real property) worth $1.6m representing his entire pension interest. 

Apart from income tax (and anti-avoidance implications), the taxpayer had to consider two issues: first could the second SMSF receive the NSW land as a transfer? Second, was the transfer liable for full ad valorem duty or concessional duty of $500?  The first issue arises because of the drafting of the SIS Act.  The second issue arises as to whether a concession provided by s61 of the NSW Duties Act applies. If the concession did not apply then ad valorem duty would apply on the transfer.

The SIS Act issue is whether the second SMSF could accept the transfer of the land despite the SIS Act prohibition on the acquisition of property from a related party.  The second SMSF could accept the transfer of the land as the land constituted business real property (and, therefore, its acquisition was an exception to the SIS Act prohibition).

The second issue - whether concessional duty applied - was the subject of the case.  The taxpayer argued that as the transferred land represented his pension interest (or part of his pension interest) and as his entire pension interest was transferred from the first SMSF, the requirements of s61 were satisfied.  The OSR held that the concession did not apply as the taxpayer had remained a member of the first SMSF (as his accumulation interest was retained in that fund).  The taxpayer objected to the assessment and the objection was referred to the Civil and Administrative Claims Tribunal of NSW.

The Tribunal held that the concession did in fact apply even though the accumulation interest of the taxpayer was retained in the first SMSF.  The reasoning of the Tribunal was that the concession applied as the transfer of land constituted part of the taxpayer’s benefits in the first SMSF and, as a result of the transfer, the taxpayer ceased to be entitled to benefits in the first SMSF which triggered the application of the concession.  In short the Tribunal found for the taxpayer but on a wider basis than argued by the taxpayer.

While the decision of the Tribunal was favourable to the taxpayer, the reasoning of the Tribunal is not overwhelming and the implications are very significant.  There are a number of issues with the reasoning and, given its wide implications, it is likely that the OSR will exercise its appeal rights in relation to the decision or propose to the Government that s61 be amended, or both.

The decision, even though it is relatively short and relates to one point only, raises a number of significant issues which are considered below:

  • As the same entity was trustee of Fund 1 and Fund 2 (there is no SIS Act reason why the same company cannot be trustee of two or more SMSFs so long as director/member rules are satisfied) – the document effecting the transfer had to be a deed rather than a real property transfer form.  The deed was necessary to effect the change in beneficial ownership given that there was no change in legal ownership.
  • The deed was expressed to be conditional upon the OSR assessing the deed as being subject to concessional duty of $500.  The Tribunal noted this point but did not discuss its implications as the Tribunal was only required to determine whether the deed should be properly assessed under s61. The significance of this drafting could be raised on appeal.
  • While the taxpayer was the sole member of both funds – the reasoning of the decision is not predicated on this fact.  Consequently Fund 1 could be a two member fund and Fund 2 could be a single member fund and vice versa.
  • There is no requirement in s61 that the real property transferred need to have been solely segregated (or dedicated) to support the taxpayer’s interests in Fund 1 before the transfer.  The requirement is that the value of the benefits transferred to Fund 2 must equal or be greater than the market value of the real property transferred.
  • The taxpayer’s argument was that as he ceased to have any pension superannuation interest in Fund 1, the requirements of s61 was satisfied.  The Tribunal held that s61 applied simply because the taxpayer ceased to be entitled to some benefits in Fund 1 which is a less stringent and more generous basis.  On the Tribunal’s reasoning s61 would apply even if the taxpayer had only an accumulation interest and was transferring only a portion of that accumulation interest to another fund.
  • If the decision is not appealed (this is unlikely given the wide implications of the decision) then taxpayers who have recently had fund to fund transfers of NSW dutiable property stamped at ad valorem rates should consider resubmitting the stamped transfers for re-assessment under s61 for $500 with a refund of the excess duty.