Overview
The Superannuation Industry (Supervision) Act (SIS Act) places many investment restrictions on the trustees of superannuation funds. One of these restrictions is the general prohibition on funds intentionally acquiring assets from a related party of the fund.
This restriction is of particular importance to trustees of self-managed superannuation funds (SMSFs) and if breached may result in significant penalties to both the trustees and fund.
General rule
Section 66 of the SIS Act prohibits a trustee or investment manager of a regulated superannuation fund from intentionally acquiring an asset from a related party of the fund.
‘Acquire’ has a wide meaning and applies to both members and other related parties selling assets to the fund and members making in-specie contributions of assets to the fund.
Who or what is a related party of the fund?
A related party is defined in the SIS Act as:
- A member of the fund
- A standard employer-sponsor of the fund
- A Part 8 associate of a member or standard employer-sponsor of the fund.
A standard employer-sponsor of the fund is an employer that contributes to the fund under an agreement between the employer and the superannuation fund. Such agreements would be a rare occurrence nowadays, as most agreements would be between the employer and the members of the fund. Agreements between the employer and the members of the fund are specifically excluded from the definition of standard employer-sponsor.
Part 8 of the SIS Act casts a wide net over associates of individuals, companies and partnerships to include them as related parties of the fund. In general terms, a Part 8 associate would include a trustee, a relative of the member or trustee, or any entities which they ‘control’ either individually or as a group. An entity would include any individual, company, partnership or trust.
Control of a company occurs where an entity/ies has sufficient influence over a company and/or holds a majority voting interest in the company.
Control of a trust generally occurs where a related party/ies has a fixed entitlement to more than 50% of the capital or income of the trust or can appoint or remove a trustee of the trust.
Example 1
Peiter and Amber are members and trustees of the Caterpillar Superannuation Fund. Together they hold 60% of the shares in an unlisted company. The company is a related party of the fund.
Example 2
Peiter and Amber also own 45% of the units in a unit trust. They do not have control of this trust; therefore, the fund can acquire units in the trust. Bear in mind a fund can acquire units in a related trust from a related party but cannot acquire units in an unrelated trust from a related party.
Exceptions to the general rule
There are number of exceptions to the general rule, and these include the acquisition of:
- Business real property acquired at market value
- Listed securities acquired at market value
- In-house assets acquired at market value where the acquisition of the asset would not result in the level of in-house assets in the fund exceeding 5% of the fund’s assets
- A life insurance policy (other than a policy acquired from a member or relative)
- Units in a widely held unit trust.
‘Market value’ is an amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset if:
- The dealings were at arm’s length;
- The sale was appropriately marketed; and
- The buyer and seller acted knowledgably and prudentially in relation to the sale.
If the asset is acquired at no cost or for less than market value, the superannuation fund will be deemed to have acquired the asset at the market value at the date of transfer.
Business Real Property
Business real property is real estate which is used wholly and exclusively for business purposes. It does not matter who is running the business as the focus is on the actual use of the property. If the sole use of the property is to operate one or more businesses, then it will meet the definition of business real property. The business can be run by a member of the fund, a related party or any other party.
If any part of the property is used for residential purposes it is not regarded as business real property in most cases. There are two exceptions to this rule:
- Where the property is used for primary production purposes and the area used for domestic purposes does not exceed two hectares; or
- The use of part of the property for residential purposes forms an integral part of the business
Example 3
The Kyriazis family company owns and operates the Weatherby Hotel. The company is a related party of the Kyriazis Family SMSF which wants to purchase the hotel. The Kyriazis family company employs Anastasiya as the manager of the hotel. Anastasiya lives on site and is expected to look after the daily management of the hotel.
Even though Anastasiya is using part of the hotel as her private residence, it is considered integral to the running of the business. The hotel would therefore still be considered business real property.
Listed Securities
A listed security includes any bond, debenture, share, unit, option or right or any other security listed on an approved stock exchange.
These would include both domestic stock exchanges, such as the Australian Stock Exchange (ASX), the Bendigo Stock Exchange and the National Stock Exchange, as well as many foreign stock exchanges (New York, London, Hong Kong, etc).
In-house assets
An in-house asset of a superannuation fund is:
- A loan to, or an investment in, a related party of the fund
- An investment in a related trust of the fund
- An asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party.
It does not include:
- A life insurance policy issued by a life insurance company (other than a policy acquired from a member of the fund or from a relative of a member)
- A deposit with an authorised deposit taking institution (e.g. bank or building society)
- Investments in a pooled superannuation trust
- An investment in a widely held unit trust.
Example 4
Sophie has a personally owned life insurance policy and would like to transfer that policy to her SMSF. Sophie is unable to do so as she is a member of the fund. To transfer the policy to her SMSF she would need to cancel the existing policy and have the Insurer reissue a new policy that is owned by her SMSF.
Widely-held unit trust
A widely held unit trust is:
- a unit trust in which entities have fixed entitlements to all of the income and capital of the trust; and
- not a unit trust in which fewer than 20 entities between them have:
- fixed entitlements to 75% or more of the income of the trust; or
- fixed entitlements to 75% or more of the capital of the trust.
An entity and its Part 8 associates are deemed to be a single entity for this purpose. An example of a widely held unit trust is a managed fund.
An exemption to the related party rules also applies where an SMSF acquires units in a related unit trust or shares in a related company, commonly known as a 13.22C unit trust or company. The rules around 13.22C unit trusts and companies will be covered in a future article.
Avoidance schemes
To prevent members from circumventing the acquisition rules, there are anti-avoidance provisions in place. These provisions prohibit a person from intentionally entering a scheme or arrangement where the likely result would be the fund acquiring an asset that would ordinarily breach the acquisition rules.
What happens if the rules are breached?
Where a fund has acquired an asset from a related party in breach of the rules, severe penalties may apply. In many cases, the transaction will need to be unwound, and the fund restored to its position prior to the transaction occurring.
If the breach is one relating to the in-house asset rule, the fund must prepare a written plan to reduce the market value of in-house assets to 5% or less. The plan must be prepared before the end of the next financial year, and the steps in the plan must be carried out. Specifically, the law requires that the plan must set out steps to take to ensure that:
- one or more of the fund’s in-house assets held at the end of the financial year are disposed of during the next financial year, and
- the value of the assets so disposed of is equal to or greater than the excess in the value of in-house assets.
What does Neo Super provide?
We are an innovative end-to-end SMSF service provider specialising in:
- SMSF administration and compliance
- Documentation services, including fund establishment, borrowing arrangements and pension documentation
- White label documentation and services for Intermediaries such as accountants and financial planners
- SMSF technical support, education, and training.
Further Information
For other service requirements, please contact our office at neo@neo-super.com.au or call 1300 083 428.
