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Self Managed Super Fund (SMSF) Article
Howard era ruling pays off for small funds

By Tony Negline.

This article may be out of date.

11th March 2009

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On 30 June 2009 an important deadline passes for some lucky small super funds.

These super funds are fortunate because they have always been able, and with good planning and advice always should be able, to invest with much greater freedom than all other small super funds.

The reason for this additional freedom comes from a government policy decision in the 1998 Federal Budget.  Back then the Howard Government announced that from the '98 Budget day, super funds would invest a small amount of their total assets in related companies or trusts.  They would also be banned from making new loans to super fund members, their relatives and related companies and trusts.  Similar rules were introduced for super fund assets leased to fund members, their relatives and related companies and trusts.

Investments, leases or loans which were completed before the announcement were permanently exempted from these new prohibitions if they satisfied certain rules.

When the change was announced the government faced down intense furor.  Ultimately the new rules started on 11 August 1999, some 15 months after their original commencement date.  The government also gave small super fund investors until 30 June 2009 to fix any problems they might have with the new rules.

Since 1998 it seems that the main beneficiaries of the permanent exemption from these new restrictions are super funds which invest in closely held unit trusts.

These exempt unit trusts are free to engage in many transactions which super funds are not normally allowed to do.  For example:

It needs to be remembered that these unit trusts can only become involved in a transaction if it's by its trust deed.

There are many misconceptions about the post June 2009 rules and how they apply to super fund investments in closely held unit trusts.  For example it is commonly assumed that:

None of these views are correct.

Depending upon how the unit trust has been structured it is possible for super funds to continue to invest new monies into a pre 11/8/1999 unit trust until 30 June 2009.  This cut-off date is quite close and some investors will need to take action this financial year because after this date no further investments are allowed.

Overall this unit trust structure is much more flexible than the so called 'instalment warrant' borrowing provisions which require the establishment of a security trust which is a special kind of trust that is neither a unit trust nor a discretionary trust.

Despite the obvious flexibility that these structures provide, investors who decide to use them need to be aware of a number of common pitfalls.  For example:

Many people who recognize the benefits of these unit trust arrangements are willing to 'purchase' the super fund and unit trust from those lucky enough to still have them.  An informal market is known to operate.

Frequently those who currently have these structures don't realize the economic potential of what they have and therefore 'sell' their current arrangement for less than it's really worth to the purchaser.  Any willing 'buyer' however needs to be careful that they are not taking over a structure that has been badly run.

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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.

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