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Financial planning, Investment and Self Managed Super Fund Article
By Tony Negline
1st September 2008
This article may be out of date.
The term in-house has been used for years to describe super fund assets that are used by the trustees, fund members or employers who contribute to the fund. It is a rather silly term, but one that is now commonly accepted within super circles.
About a decade ago, the then Coalition Government decided to make significant changes to this area of the law. Some of the changes that were ultimately adopted had an end date of July 2009. As this date fast approaches, some people are getting very excited about discussing this topic in much greater detail.
To keep you informed, in this edition of ATC Digest I discuss some general important concepts about in-house assets. In the next edition I will cover the exemption rules and some of the general misconceptions that are generally seen in them.
Why would anyone want to access their super fund assets?
As the SMSF members are the trustees, they are the people who ultimately make all investment decisions for their fund. Compared to all other super investments, SMSF members and trustees have unrivalled influence in how a fund invests its capital.
Most SMSF users find this flexibility important. A recent study by the research company Investment Trends found that, for members and trustees, more control of investments was one of the main reasons they set up their SMSF.
It is common for SMSF trustees and members to want to use some or all of their fund’s assets for personal or business purposes. There are many examples: a fund might own the premises where the members (or their relatives or close associates) run a business; a fund might lease business equipment to the members’ business; or a fund might own a holiday home which is sometimes used by members or their relatives.
There are at least three possible motivations:
- access to capital
- finance arrangements which are easier to implement; and
- access to the tax advantages of superannuation.
However, before an SMSF trustee rushes out and buys the first item they see, it is important to point out that there are a large range of conditions and restrictions that have to be worked through before an asset is ultimately purchased.
Super laws restrictions
The super laws contain some very important restrictions on how related parties can use the money in a super fund for their own purposes. In general terms, only five percent of the market value a super fund’s assets can be used by these people.
In this section we will discuss who related parties are; what using super fund assets means; and what market value means in this section of the law.
This IHA-test applies in relation to a SMSF to anyone who is deemed by the law to be a related party of the fund.
A related party of a super fund is the members (and hence the trustees of a SMSF), a standard employer sponsor of the fund and Part 8 Associates of the members or the fund’s standard employer sponsors.
Part 8 Associates
The definition of Part 8 Associates is complicated. Several years ago the ATO summarised Part 8 Associates as “including, but not limited to, relatives, partners1, companies where the members or their associates have a significant influence and majority voting interest, and related trusts”2.
Standard Employer Sponsor
This is an employer who contributes to a fund because the employer has selected that fund and there is an arrangement between the employer and the super fund’s trustee.
A standard employer sponsored fund is a fund that has an arrangement with at least one standard employer sponsor.
These definitions are best explained by an example:
XYZ Ltd is a large multi-national company and operates its own superannuation fund for its employees.
Some employees of XYZ Ltd can elect to request that their contributions be placed in another super fund, including a SMSF if it is a complying super fund. The super funds set up by XYZ Ltd for its employees will be standard employer sponsored funds because XYZ Ltd is a standard employer sponsor of those funds.
Traditionally, super funds have required employers making contributions to become a participating employer. This requirement is a throw back to many years ago and essentially was an agreement stating that the employer would abide by the terms of the trust deed. The Howard Government proposed to remove this requirement, but didn’t implement this policy change before losing the 2007 election.
In small business arrangements it is often extremely difficult to know with any certainty that a particular super fund would be used. This is not always the case because some small business employers have become participating employers of their super fund. In any case, under the super laws the ATO can deem an employer to be a standard employer sponsor.
When an asset is classed as an in-house asset?
A super fund asset will have IHAs if it has any of the following with a related party:
- a loan
- an investment in the related party including a related trust
- a fund asset subject to a lease or lease arrangement
- regulator decides that asset should be IHA.
There are some important exemptions:
- business real property, but only for funds with less than five members (i.e. including SMSFs)
- an investment in a widely held trust
- property owned by a super fund and a related party as tenants in common (if a lease exists between the super fund and the related party on this property then this exemption doesn’t apply)
- investments in companies and unit trusts deemed by regulations not to be an IHA
- investments in companies or unit trusts which are specifically exempt because they were put in place before 11 August 1999
- pre-11 August 1999 lease or lease arrangements
- security trusts used for Instalment Warrant borrowings,
Business Real Property
This is a very popular exemption and is property used wholly and exclusively in the running of a business or businesses.
Widely Held Trust
These must be a unit trust where entities have fixed entitlements to all the income and capital of the trust. Additionally, there must be at least 20 unitholders who have at least the fixed right of entitlement to 75% or more of the trust’s income or capital.
It is important to note that an entity and its Part 8 Associates are deemed to be a single entity. For example, suppose an individual is a member of a SMSF, owns 50% of a company and also 50% of the units in a small unit trust. The individual, the company and the small unit trust are Part 8 Associates of the SMSF (and of each other). This means that if they held units in a Widely Held Trust, all of them would be classed as a single entity for the above test.
Investments in companies and unit trusts deemed by regulations not to be an IHA
The SIS Regulations currently provide two exemptions. Both exemptions have the same qualification rules.
The key difference is that one exemption applies to assets purchased before 28 June 2000 and the other exemption applies to assets purchased from 28 June 2000 onwards.
- A fund has less than five members (that is, it applies only to SAFs or SMSFs) and has an asset which is an investment in a company or trust
- If either qualification rules applied, but ceased to apply (because any of them have been beached) then both exemptions cease to apply to any other super fund asset held in the company or trust
- The company or trust does not have a lease with any of the super fund’s related parties unless the lease relates to business real property and the lease is legally binding.6
- The company or trust cannot have a lease with non-related parties to the super fund if those entities have a lease with any of the super fund’s related parties unless the lease relates to business real property and the lease is legally binding.6
- The company or trust does not have any outstanding borrowings
- At all times the company or trust assets do not have:
* an interest in another entity
* a loan to another entity unless it is a deposit with an authorised deposit-taking institution (such as a bank, credit union or cash management trust)
* an asset which has a charge over it
* an asset acquired from any of the super fund’s related parties after 11 August 1999 unless the asset was business real property acquired at market value
* an asset (other than the asset was business real property acquired at market value) had at any time been an asset of any of the super fund’s related parties between 12 August 1999 and 27 June 2000. This applies for the IHA test exemption for super fund investments which took place before 28 June 20007
* an asset (other than the asset was business real property acquired at market value) had at any time been an asset of any of the super fund’s related parties since the later of 11 August 1999 and three years from the day on which the fund first acquired an interest in the company or trust. This applies for the IHA test exemption for super fund investments which took place after 27 June 2000
7. The company or trust conducts a transaction on a non-arm’s length basis.
This is an important suite of exemptions, but there are some traps for the unwary.
As noted above in item two, if either qualification rules cease to apply (because any of them have been breached) then both exemptions cease to apply to any other asset held by the fund in the relevant company or trust.
The ATO issued a Self Managed Superannuation Fund Determination SMSFD 2008/18 issued on 20 February 2008. In that ruling the ATO make the point that all current and future investments in the company or trust can never be excluded from fund assets and that this continues to apply “even if the circumstance that caused the event to happen no longer exists”.
1 . This is partner in a partnership. Spouses (sadly often referred to as “partners”) are a relative.
2 Self Managed Superannuation Funds – Roles & Responsibilities of Approved Auditors, Australian Taxation Office, July 2004.
The full definition of Part 8 is as follows:
An individual’s Part 8 Associates include:
- their relatives
- each member of the same SMSF
- all partners in a partnership
- each spouse and child of all partners in a partnership
- the trustees of any trust that the individual controls
- a company sufficiently influenced by the individual or one or more Part 8 Associates of the individual
- a company in which a majority voting interest is held by the individual or one or more Part 8 Associates of the individual.
A company’s Part 8 Associates include:
- a partner of the company
- a partnership in which the company is a partner
- if an individual is a partner of the company, then the spouse or child of that individual
- an entity sufficiently influenced by the company individual or one or more Part 8 Associates of the company.
3 . The super laws define this as “the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings”.
4. A trust that a member or a standard employer-sponsor of the fund controls other than an excluded instalment trust of the fund. An excluded instalment trust means a trust “that arises because a trustee or investment manager of the superannuation fund makes an investment under which a listed security…is held in trust until the purchase price of the underlying security is fully paid” and “the listed security, and property derived from it is the only trust property” and “where an investment in the listed security held in trust would not be an in-house asset of the superannuation fund”.
5. The super laws define this to mean “any agreement, arrangement or understanding in the nature of a lease (other than a lease) between a trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings”.
6. This exemption will cease to apply if the property ceases to be business real property or the lease ceases to be legally binding.
7. This does not include money or shares in a company.
8. Self Managed Superannuation Funds: how does the happening of an event in subregulation 13.22D(1) of the Superannuation Industry (Supervision) Regulations 1994 affect whether a self managed superannuation fund’s investments in related companies or unit trusts are in-house assets of the fund?
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.