House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 4 - Self managed superannuation funds - acquisitions and disposals of certain assets between related parties

Outline of chapter

4.1 Schedule 4 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to prescribe requirements for acquisitions and disposals of certain assets between self managed superannuation funds (SMSFs) and related parties. These requirements ensure that these transactions are conducted with transparency and are not used to circumvent the requirements of the superannuation law.

4.2 All references in this chapter are to the SIS Act unless otherwise stated.

Context of amendments

4.3 The Super System Review (Review) noted that SMSFs are closely held entities (as all members must also be trustees or directors of a corporate trustee) which may provide the opportunity for SMSF members to engage in behaviour that is inconsistent with the Government's retirement policy that superannuation savings should be invested for the sole purpose of providing an income in retirement.

4.4 While the Review acknowledged that some related party investments are consistent with Government policy, the Review was concerned that the current rules still provide avenues for potential abuse.

4.5 The Review was concerned that the off market acquisition and disposal of assets between related parties and SMSFs, where the guiding mind of both buyer and seller can effectively be the same person, lacks transparency, is inherently risky and is open to greater abuse than non-related party transactions.

4.6 The Review believed that the current provisions regulating related party acquisitions are insufficient to mitigate the risk of transaction date and asset value manipulation to illegally benefit the SMSF or a related party. The Review did, however, conclude that SMSFs should retain the ability to conduct certain limited related party transactions.

4.7 The Review recommended that acquisitions and disposals of assets between related parties and SMSFs should be conducted through an underlying market where one exists, or where one does not exist, must be supported by a valuation from a suitably qualified independent valuer.

4.8 Schedule 4 to the Bill implements the Government's response to the Review's recommendations in relation to acquisitions and disposals of assets between SMSFs and related parties.

4.9 These amendments will provide greater transparency to related party acquisitions and disposals, enabling SMSF approved auditors and the Commissioner of Taxation (Commissioner), as Regulator, to monitor these transactions more effectively, which will enhance the integrity of the SMSF sector.

Summary of new law

4.10 Schedule 4 to the Bill:

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amends the existing prohibition on superannuation funds acquiring assets from related parties so that it applies to all regulated superannuation funds other than SMSFs;

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introduces a specific prohibition against trustees and investment managers of SMSFs acquiring assets from related parties, subject to certain exceptions;

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introduces new rules for SMSF trustees and investment managers when disposing of assets to related parties;

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introduces a new prohibition on schemes which avoid the operation of these new rules regulating SMSF related party transactions; and

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introduces administrative and civil penalties for contravention of these new rules.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 Schedule 4 prescribes requirements for acquisitions and disposals of certain assets between SMSFs and related parties. These requirements ensure that these transactions are conducted with transparency and are not used to circumvent the requirements of the superannuation law.

4.12 The requirements in section 66 relating to acquisitions of certain assets from members of regulated superannuation funds will continue to apply to regulated superannuation funds, except SMSFs. [Schedule 4, item 7, subsection 66(1)]

Acquisitions of certain assets by self managed superannuation funds

4.13 A trustee or an investment manager of an SMSF must not acquire an asset from a related party of the fund, subject to a number of exceptions. [Schedule 4, item 13, subsection 66A(2)]

4.14 An investment manager is a person appointed by a trustee of a fund or trust to invest on behalf of the trustee, or the trustees, of the fund or trust.

4.15 An asset is any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country). For the avoidance of doubt, acquisition of an asset includes in specie contributions to an SMSF by a related party of an SMSF.

4.16 A related party is any of the following:

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a member of the fund;

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a standard employer-sponsor of the fund; and

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an associate of one of those entities.

4.17 Part 8 of the SIS Act specifies who is an associate for different types of entities, including individuals and companies.

Exceptions

4.18 There are a number of exceptions to the prohibition on a trustee or investment manager acquiring an asset from a related party of the fund. [Schedule 4, item 13, subsections 66A(3) and (4)]

Listed securities

4.19 A trustee or investment manager may acquire an asset from a related party if the asset is a listed security and it is acquired in a way prescribed by the regulations. [Schedule 4, item 13, paragraph 66A(3)(a)]

4.20 A listed security is a security listed for quotation in the official list of:

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a licensed market within the meaning of section 761A of the Corporations Act 2001 (defined as a financial market the operation of which is authorised by an Australian market licence);

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an approved stock exchange within the meaning of the Income Tax Assessment Act 1997 (which are listed in Schedule 5 to the Income Tax Assessment Regulations 1997 ); or

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a market exempted under section 791C of the Corporations Act 2001 (which lists exemptions from the requirement to be licensed).

4.21 Under the current section 66, SMSF trustees and investment managers have been able to acquire listed securities from related parties provided they are acquired at market value. The method by which these transactions have been effected has been dependent on the rules of the market the securities are traded on. For example, ownership of listed securities traded on the Australian Securities Exchange may be transferred off-market between parties through the use of a Transfer Form for Non-Market Transactions. The Review found that such transactions outside a formal market lack transparency and can be used to manipulate transaction dates and asset values to illegitimately benefit the SMSF or a related party.

4.22 Trustees and investment managers of SMSFs will not be prohibited from acquiring listed securities from related parties, provided that the appropriate method, as may be prescribed in the regulations, is used. The rules for acquiring listed securities are to be prescribed by regulation due to the broad definition of 'listed securities'.

Business real property

4.23 A trustee or investment manager of an SMSF may acquire an asset from a related party if the asset is business real property acquired at market value, as determined by a qualified independent valuer. [Schedule 4, item 13, paragraph 66A(3)(b)]

4.24 The terms 'business real property' and 'real property used in primary production business' are currently only defined for the purposes of section 66. Schedule 4 repeals these current definitions in subsection 66(5) and inserts a definition of 'business real property' into the definitions section (section 10), which incorporates the concepts of 'business' and 'real property used in primary production business'. The existing definitions have been moved and reworded to provide clarity, however it is not intended that this amendment will change their existing meanings. [Schedule 4, items 1 and 9 to 11, subsections 10(1) and 66(5]

4.25 Business real property means:

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any freehold or leasehold interest of the entity in real property;

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any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

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if another class of interest relating to real property is prescribed by regulations, any interest of that class held by the entity;

if the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not).

[Schedule 4, item 3, subsection 21(1)]

4.26 Business real property does not include any interest held in the capacity of beneficiary of a trust estate. [Schedule 4, item 3, subsection 21(2)]

4.27 For the purposes of the definition of 'business real property', real property used in one or more primary production businesses does not cease to be used wholly and exclusively in those businesses only because:

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an area of the real property, not exceeding two hectares, contains a dwelling used primarily for domestic or private purposes; and

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the area is also used primarily for domestic or private purposes;

provided that the use for domestic or private purposes is not the predominant use of the real property. [Schedule 4, items 3 and 12, subsections 21(3) and 66(6)]

4.28 For the purposes of the definition of 'business real property', business includes any profession, trade, employment, vocation or calling carried on for the purposes of profit, including the carrying on of primary production and the provision of professional services, but does not include occupation as an employee. [Schedule 4, item 3, subsection 21(4)]

4.29 Schedule 4 also inserts a definition of primary production business in subsection 10(1) as having the same meaning as in the Income Tax Assessment Act 1997 . [Schedule 4, item 2, subsection 10(1)]

4.30 To satisfy this exception, trustees and investment managers of SMSFs will be required to obtain a market valuation from a 'qualified independent valuer'. A valuer may be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. This may be demonstrated by being a current member of a relevant professional body or trade association.

4.31 The valuer must also be independent. Therefore, the valuer cannot be a member of the fund or a related party of the fund. They should be impartial, unbiased and not be influenced or appear to be influenced by others.

4.32 Independent and impartial valuation services are also offered by the Australian Valuation Office.

4.33 This exception is not intended to operate or apply in a different manner than the current exception in paragraph 66(2)(b) which applies to other regulated superannuation funds, except that the asset must be acquired at market value as determined by a qualified independent valuer.

4.34 Market value , in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

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that the buyer and seller dealt with each other at arm's length in relation to the sale;

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that the sale occurred after proper marketing of the asset; and

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that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

Mergers between regulated superannuation funds

4.35 A trustee or investment manager may acquire an asset from a related party under a merger between regulated superannuation funds at market value, as determined by a qualified independent valuer. [Schedule 4, item 13, paragraph 66A(3)(c)]

4.36 This exception is not intended to operate or apply in a different manner to SMSFs than the exception in the current paragraph 66(2)(c) which applies to regulated superannuation funds, except that the asset must be acquired at market value as determined by a qualified independent valuer.

In-house assets

4.37 A trustee or investment manager may acquire an asset from a related party if the acquisition of the asset constitutes an investment in certain in-house assets (those covered by paragraph 66(2A)(a)), is at market value as determined by a qualified independent valuer, and would not result in the level of in-house assets of the fund (within the meaning of Part 8) exceeding the level permitted by that Part. [Schedule 4, item 13, paragraph 66A(3)(d)]

4.38 This exception is not intended to operate or apply in a different manner to SMSFs than the exception in the current subsection 66(2A), except for the requirement for market value to be determined by a qualified independent valuer.

Change of trustees

4.39 A trustee or investment manager may acquire an asset from a related party if the acquisition is solely a result of a change to the trustees of an SMSF. [Schedule 4, item 13, paragraph 66A(3)(e)]

Example 4.17 :

Anthony, Ian, Jennifer and Edwina (all siblings) are individual trustees of Purple SMSF. Anthony and Jennifer cease to be members and trustees of Purple SMSF. Their interest in the trust property will transfer to the remaining trustees. This exception ensures that the prohibition on acquiring an asset from a related party does not apply to prevent such a change in trustees.

Money

4.40 A trustee or investment manager may acquire an asset from a related party if the asset is money. [Schedule 4, item 13, paragraph 66A(3)(f)]

4.41 An asset includes money (whether Australian currency or currency of another country). This exception ensures that a trustee or an investment manager of an SMSF may accept money from a related party. This exception is not intended to operate or apply in a different manner to SMSFs than the way that the current section 66 allows a regulated superannuation fund to accept money from a related party, for example, in the form of contributions.

Determination by the Regulator

4.42 A trustee or investment manager of an SMSF may acquire an asset from a related party if the asset is of a kind that the Regulator, by legislative instrument, determines may be acquired by SMSFs. The Regulator may make a determination that specifies different kinds of assets for different classes of SMSFs. [Schedule 4, item 13, paragraph 66A(3)(g)]

4.43 This exception will provide the Regulator with flexibility to determine that SMSFs may acquire certain assets in certain circumstances. The Regulator may or may not determine conditions in relation to the acquisition, including that the acquisition must occur at market value, as determined by a qualified independent valuer.

4.44 This exception is not intended to operate or apply in a different manner to SMSFs than the current exception in paragraph 66(2)(d) applies to regulated superannuation funds.

Breakdown of relationships

4.45 A trustee or investment manager of an SMSF may acquire an asset from a related party if certain requirements relating to the breakdown of relationships listed in subsections 66(2B) and (2C) are satisfied. [Schedule 4, item 13, subsection 66A(4)]

4.46 This exception is intended to apply to acquisitions involving SMSFs and related parties, as it currently applies to acquisitions involving regulated superannuation funds. Referring to subsections 66(2B) and 66(2C) in subsection 66A(4) avoids unnecessary repetition of the legislation.

Disposals of certain assets by self managed superannuation funds

4.47 Schedule 4 also inserts requirements relating to disposals of certain assets by SMSFs to related parties.

4.48 A trustee or an investment manager of a SMSF must not dispose of an asset to a related party of the fund, unless an exception applies. [Schedule 4, item 13, subsection 66B(2)]

4.49 For the avoidance of doubt, disposal of an asset includes in specie payments to a related party by an SMSF.

Exceptions

4.50 There are a number of specific exceptions and one general exception to the prohibition on a trustee or investment manager acquiring an asset from a related party of the fund.

Listed securities

4.51 A trustee or investment manager may dispose of an asset to a related party if the asset is a listed security and the disposal is in a way prescribed by the regulations. [Schedule 4, item 13, paragraph 66B(3)(a)]

4.52 The regulations may prescribe the way in which SMSFs may dispose of listed securities to related parties of an SMSF. The rules for disposing of listed securities are to be prescribed by regulation due to the need to provide sufficient detail and flexibility for different types of 'listed securities'.

Collectables and personal use assets

4.53 A trustee or investment manager may dispose of an asset if the asset is one to which regulations in force for the purposes of section 62A (about collectables and personal use assets) apply. [Schedule 4, item 13, paragraph 66B(3)(b)]

4.54 This exception ensures that the existing detailed rules continue to apply when a trustee of an SMSF disposes of certain collectable and personal use assets to related parties for which regulations have been made.

Money

4.55 A trustee of investment manager may dispose of an asset to a related party if the asset is money. [Schedule 4, item 13, paragraph 66B(3)(c)]

4.56 This exception ensures that a trustee or an investment manager of an SMSF may continue to make payments of money to a related party, for example, lump sum superannuation benefits and pensions.

Determination by the Regulator

4.57 A trustee or investment manager of an SMSF may dispose of an asset to a related party if the asset is of a kind that the Regulator, by legislative instrument, determines may be disposed of by SMSFs. The Regulator may make a determination that specifies different kinds of assets for different classes of SMSFs. [Schedule 4, item 13, paragraph 66B(3)(d)]

4.58 This exception will provide the Regulator with flexibility to determine that SMSFs may dispose of certain assets in certain circumstances. The Regulator may or may not determine conditions in relation to the disposal, including that the disposal must occur at market value, as determined by a qualified independent valuer.

Change in trustees

4.59 A trustee or investment manager may dispose of an asset to a related party if the disposal is solely as a result of a change to the trustees of an SMSF. [Schedule 4, item 13, paragraph 66B(3)(e)]

Example 4.18 :

Ian and Edwina are trustees of Purple SMSF. Their siblings, Anthony and Jennifer become members and trustees of Purple SMSF. An interest in the trust property will transfer to the new trustees. This exception ensures that the prohibition on disposing of an asset to a related party does not apply to prevent such a change in trustees.

General exception - disposal for market value, as determined by a qualified independent valuer

4.60 If the asset is not a listed security, a trustee or investment manager may dispose of the asset to a related party if the asset is disposed of for market value, as determined by a qualified independent valuer. [Schedule 4, item 13, paragraph 66B(3)(f)]

Breakdown of relationships

4.61 A trustee or investment manager of an SMSF may dispose of an asset to a related party if the disposal of the asset is to a trustee or investment manager of another self managed superannuation fund, and the trustee or investment manager of the other fund may acquire the asset because the requirements relating to the breakdown of relationships covered by subsections 66(2B) and (2C) are satisfied in relation to the acquisition of the asset by the other fund. [Schedule 4, item 13, subsection 66B(4)]

4.62 This exception ensures that where there is a disposal of an asset to a trustee or investment manager of another superannuation fund as a result of a relationship breakdown, an exception applies for disposals in the corresponding way that it applies to acquisitions.

Prohibition on avoidance schemes

4.63 Schedule 4 introduces a prohibition on avoidance schemes, similar to the prohibition contained in subsection 66(3) that applies to acquisition of certain assets by regulated superannuation funds. The prohibition specific to SMSFs is intended to apply in in relation to acquisitions and disposals of assets in a similar manner to the prohibition relating to acquisitions of certain assets by regulated superannuation funds.

4.64 This prohibition makes it clear that trustees and investment managers of SMSFs must not enter into schemes to circumvent the application of the prohibition on acquisition and disposal of certain assets between related parties.

4.65 A person must not enter into, commence to carry out, or carry out a scheme (within the meaning of section 66) if all the following are satisfied:

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the scheme results, or is likely to result, in a trustee or an investment manager of an SMSF:

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acquiring an asset from an entity; or

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disposing of an asset to an entity,

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the scheme avoids the prohibition from applying to the acquisition, or the disposal, (as appropriate) because the entity is not a related party of the fund;

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that subsection would so apply were the entity a related party of the fund; and

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the entity has a connection, directly or indirectly through one or more interposed entities, with a related party of the fund.

[Schedule 4, item 13, subsection 66C(1)]

4.66 Scheme means:

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any agreement, arrangement, understanding, promise or undertaking:

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whether expressed or implied; or

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whether or not enforceable, or intended to be enforceable by legal proceedings, and

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any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Penalties

Administrative penalties

4.67 A trustee or director of a corporate trustee who contravenes the new prohibitions will be liable to an administrative penalty of 60 penalty units for each contravention. [Schedule 4, item 19, subsection 166(1)]

4.68 The provisions relating to administrative penalties in Schedule 4 commence immediately after the commencement of item 23 of Schedule 3 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012, which proposes the new administrative penalty framework. [Schedule 4, item 20]

Civil penalties

4.69 The provisions relating to acquisitions and disposals of assets, and the prohibition of avoidance schemes are all civil penalty provisions. Part 21 of the SIS Act provides for civil and criminal consequences of contravening, or being involved in a contravention of these subsections.

4.70 The Regulator may seek a civil penalty order of up to 2,000 penalty units for contravention of a civil penalty provision. If a trustee or investment manager contravenes a civil penalty provision either dishonestly and intending to gain an advantage for a person, or intending to deceive or defraud a person, the trustee or investment manager is guilty of an offence punishable on conviction by imprisonment for not longer than five years. [Schedule 4, items 13 and 14, subsections 66A(2), 66B(2), 66C(1) and paragraph 193(b]

Transitional provisions - in house assets

4.71 Schedule 4 inserts a new definition of 'business real property' into the definitions section of the SIS Act, which applies from the commencement date of 1 July 2013 (see paragraph 4.24).

4.72 Schedule 4 also provides for a transitional provision in relation to the current definition of 'business real property' in subsection 66(5). Item 9 of Schedule 1 to the Superannuation Industry (Supervision) Amendment Act 2010 deleted of the words '(within the meaning of subsection 66(5))' following the reference to 'business real property' in paragraph 71(1)(g), which relates to the meaning of an in-house asset. Omitting this reference to the meaning of 'business real property' as it appears in paragraph 71(1)(g) may have created uncertainty as to the meaning of 'business real property' for the purposes of paragraph 71(1)(g). This transitional provision re-instates the words '(within the meaning of subsection 66(5))' after the reference to 'business real property' in paragraph 71(1)(g) from the date of enactment of the Superannuation Industry (Supervision) Amendment Act 2010 to remove any uncertainty. [Schedule 4, item 4]

Consequential amendments

4.73 Section 62A provides that regulations may prescribe rules in relation to trustees of SMSFs making, holding and realising investments involving certain collectables and personal use assets. Schedule 4 clarifies that subsection 62A(1) has effect subject to section 66A, relating to acquisitions of assets by SMSFs. [Schedule 4, items 5 and 6, subsections 62A(1) and 62A(2)]

4.74 Schedule 4 also makes a minor amendment to subparagraph 66(2A)(a)(iv) to remove a reference to a paragraph which has been repealed. [Schedule 4, item 8, subparagraph 66(2A)(a)(iv)]

4.75 Schedule 4 also inserts notes to clarify that an administrative penalty applies to a contravention of the prohibition on acquiring or disposing of an asset to a related party. [Schedule 4, items 15 to 18, subsections 66A(2) and 66B(2)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax and Superannuation Legislation Amendment (2013 Measures No. 1) Bill 2013

4.76 Schedule 4 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.77 Schedule 4 introduces requirements relating to acquisitions and disposals of certain assets involving self managed superannuation funds (SMSFs) and related parties.

4.78 SMSFs are closely held entities where there is a maximum of four members and all members must also be trustees of the superannuation fund.

4.79 The Super System Review (Review) noted that given the nature of SMSFs as closely held entities, related party transactions are inherently risky and open to greater abuse than non-related party transactions, as the buyer and seller are effectively the same person.

4.80 While the Review debated recommending prohibiting all related party transactions, it concluded that retaining the ability to conduct limited related party transactions was still a desirable feature.

4.81 Schedule 4 implements the Government's response by amending the current law to provide specific rules acquisitions and disposals between SMSFs and related parties, specifically Schedule 4:

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introduces a specific prohibition against trustees and investment managers of SMSFs acquiring assets from related parties, subject to certain exceptions;

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introduces new rules for SMSF trustees and investment managers when disposing of assets to related parties;

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introduces a prohibition on schemes which avoid the operation of these new rules regulating SMSF related party transactions; and

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introduces administrative and civil penalties for contravention of these new rules.

4.82 Schedule 4 imposes an administrative penalty for contravention of the new requirements relating to acquisitions and disposals. The administrative penalty is 60 penalty units. The level of administrative penalty is consistent with other civil penalty provisions in the Superannuation Industry (Supervision) Act 1993 (see subsections 65(1), 67(1), 84(1) and 106(1)).

4.83 A civil penalty may only be imposed by a court, on application by the Regulator. Where a court is satisfied that a person has contravened a civil penalty provision, a court may impose a monetary penalty up to a maximum 2,000 penalty units.

4.84 Schedule 4 introduces a specific penalty regime for SMSFs in comparison to the current penalty regime for regulated superannuation funds under section 66 of the Superannuation Industry (Supervision) Act 1993 . The new prohibition on acquisitions and disposals between SMSFs and related parties does not contain an element of 'intention'. This is appropriate for SMSFs as closely held funds where all members must also be trustees and any related party transactions should be apparent. It is also not appropriate to impose penalties under the new regime on a provision which contains and element of intention.

4.85 Contravention of a civil penalty provision may however constitute an offence where a court is satisfied a person has contravened a civil penalty provision either dishonestly and intending to gain an advantage for a person, or intending to deceive or defraud someone. An offence is punishable on conviction by imprisonment for a maximum of five years.

Human rights implications

4.86 Schedule 4 does not engage any of the applicable rights or freedoms.

Conclusion

4.87 Schedule 4 is compatible with human rights as it does not raise any human rights issues.

Minister for Financial Services and Superannuation, the Hon Bill Shorten