Explanatory Statement
Issued by the authority of the Assistant TreasurerExplanatory Statement
Superannuation Industry (Supervision) Act 1993
Superannuation Industry (Supervision) Amendment Regulations 2000 (No. 2)
The Superannuation Industry (Supervision) Act 1993 (the Act) regulates the investments of superannuation funds, including by limiting investments in in-house assets. In-house assets include investments in companies and trusts controlled by members and/or employer-sponsors of the fund. In-house assets also include assets leased to a member or an employer-sponsor. There are a range of exceptions, including an exception to allow small superannuation funds (with fewer than 5 members) to lease real property to members and employer-sponsors for business purposes.
Section 353 of the Act provides that the Governor-General may make regulations for the purposes of the Act. Section 71 provides that in-house assets of a class of superannuation funds does not include a class of assets specified in regulations.
The purpose of the regulations is to specify that the in-house assets of small superannuation funds (with fewer than 5 members) do not include investments in companies or trusts that meet specified conditions. The regulations will enable a small superannuation fund to jointly invest with members and employer-sponsors in a company or trust that owns real property used for business purposes, and allow the business real property to be leased to members and employer-sponsors. The regulations specify conditions that apply to the company or trust. These conditions are designed to maintain the objectives of the investment rules that apply directly to superannuation funds.
The Regulations are described in detail in Attachment A.
A Regulation Impact Statement (RIS) is at Attachment B.
The Regulations commence on gazettal.
SUPERANNUATION INDUSTRY (SUPERVISION) AMENDMENT REGULATIONS 2000 (NO. 2)
Clause 1 - Name of Regulations
This clause provides the mode of citation of the Regulations: the Superannuation Industry (Supervision) Amendment Regulations 2000 (No. 2).
This clause provides that the Regulations commence on gazettal.
Clause 3 - Amendment of Superannuation Industry (Supervision) Regulations 1994
This clause provides that Schedule 1 of the Regulations amends the Superannuation Industry (Supervision) Regulations 1994.
SCHEDULE 1 AMENDMENTS
The regulations insert Division 13.3A: In-house assets of superannuation funds into the Superannuation Industry (Supervision) (SIS) Regulations 1994. The purpose of this Division is to provide an exception to the definition of in-house asset (under subparagraph 71(1)(j)(ii) of the SIS Act) to allow a small superannuation fund to jointly own business real property with related parties of the fund (through a company or unit trust).
This is achieved by allowing a small superannuation fund to invest in related companies and unit trusts that meet specified conditions, without the investment being treated as an in-house asset. If the company or unit trust subsequently ceases to meet the conditions, the exception will no longer apply to the existing investment(s) and all future investments by the superannuation fund in the company or unit trust. The company or unit trust may hold assets other than business real property, if not specifically excluded by the regulations.
Division 13.3A contains four regulations: regulations 13.22A, 13.22B, 13.22C and 13.22D. These specify the requirements that must be met for an asset of a small superannuation fund to qualify for the exception.
The other SIS rules that regulate the investment activities of superannuation funds (for example the sole purpose test) continue to apply in respect of assets of superannuation funds that qualify for the exception.
Division 13.3M In-house assets of superannuation funds
Regulation 13.22M Definitions for Division 13.3A
Regulation 13.22A defines the terms 'business real property', 'lease arrangement' and 'trustee of a unit trust for the purposes of Division 13.3A.
Regulation 13.22B: Asset held at commencement of Division 13.3A (Act s 71)
An investment by a small superannuation fund in a company or unit trust, made before the regulations are gazetted, will not be an in-house asset if the company or trust meets the requirements in regulation 13.22B and continues to meet the requirements in regulation 13.22D.
The requirements of regulation 13.22B are as follows:
- •
- The asset must be an investment in a company or unit trust (paragraph (1)(a)).
- •
- Subregulation 13.22D(3) does not apply to the investment in the company or unit trust (paragraph (1)(c)).
- •
- Subregulation 13.22D(3) applies if an event specified in subregulation 13.22D(I) occurs after the Division commences and when the superannuation fund has an investment in the company or unit trust.
- •
- When the Division commences the superannuation fund must have fewer than five members (paragraph 2(a)).
- •
- When the Division commences the company or a trustee of the unit trust must not be party to a lease or lease arrangement with a related party (paragraphs 2(b) and 2(c)). This requirement does not apply to leases and legally binding lease arrangements for business real property.
- •
- When the Division commences the company or a trustee of the unit trust must not be party to a lease or lease arrangement (with any party) in relation to an asset that is subject to a lease or lease arrangement with a related party (paragraphs 2(d)). This requirement does not apply to business real property.
- •
- When the Division commences the company or trustee of the unit trust must not have any outstanding borrowings, that is, the company or trustee must be completely debt free at the time the Division commences (paragraph 2(e)).
- •
- When the Division commences the assets of the company or unit trust must not include:
- -
- an interest in another entity (subparagraph 2(f)(i)) (the definition of entity is included in section 10 of the SIS Act).
- -
- a loan to another entity (subparagraph 2(f)(ii)) (the definition of entity includes an individual). This does not apply to deposits with authorised deposit-taking institutions within the meaning of the Banking Act 1959.
- -
- an asset over which, or in relation to which, there is a charge (subparagraph 2(f)(iii)).
- -
- an asset that was acquired from a related party of the superannuation fund after 11 August 1999 (subparagraph 2(f)(iv)). This does not apply if the asset was business real property acquired at market value.
- -
- an asset that had been an asset of a related party of the superannuation fund at any time in the period from the end of 11 August 1999 to the date the Division commences (subparagraph 2(f)(v)). This does not apply if the asset was business real property acquired by the company or a trustee of the unit trust at market value.
For the purposes of subparagraphs (f)(iv) and (f)(v), money and a share in the company are not assets (subregulation 3). That is, the acquisition of these assets is not covered by these provisions.
Regulation 13.22C Asset acquired after commencement of Division 13.3A (Act s 71)
An investment by a small superannuation fund in a company or unit trust, made after the regulations are gazetted, will not be an in-house asset if the company or trust meets the requirements in regulation 13.22C and continues to meet the requirements in regulation 13.22D.
The requirements of regulation 13.22C are as follows:
The asset must be an investment in a company or unit trust (paragraph (1)(a)).
Subregulation 13.22D(2) does not apply to the investment in the company or unit trust (paragraph (1)(c)).
Subregulation 13.22D(2) applies if an event specified in subregulation 13.22D(I) occurs after the Division commences and when the superannuation fund has an investment in the company or unit trust.
When the asset is acquired the superannuation fund must have fewer than five members (paragraph 2(a)).
When the asset is acquired the company or a trustee of the unit trust must not be party to a lease or lease arrangement with a related party (paragraphs 2(b) and 2(c)). This requirement does not apply to leases and legally binding lease arrangements for business real property.
When the asset is acquired the company or a trustee of the unit trust must not be party to a lease or lease arrangement (with any party) in relation to an asset that is subject to a lease or lease arrangement with a related party (paragraphs 2(d)). This requirement does not apply to business real property.
When the asset is acquired the company or trustee of the unit trust must not have any outstanding borrowings, that is, the company or trustee must be completely debt free (paragraph 2(e)).
When the asset is acquired the assets of the company or unit trust must not include:
- -
- an interest in another entity (subparagraph 2(1)(i)).
- -
- a loan to another entity (subparagraph 2(f)(ii)) (the definition of entity includes an individual). This does not apply to deposits with authorised deposit-taking institutions within the meaning of the Banking Act 1959.
- -
- an asset over which, or in relation to which, there is a charge (subparagraph 2(f)(iii)).
- -
- an asset that was acquired from a related party of the superannuation fund after 11 August 1999 (subparagraph 2(f)(iv)). This does not apply if the asset was business real property acquired at market value.
- -
- an asset that had been an asset (apart from business real property acquired by the company or a trustee of the unit trust at market value) of a related party of the superannuation fund at any time since the later of.
- the end of 11 August 1999 (subsubparagraph 2(f)(v)(A));
- the day 3 years before the day on which the superannuation fund first acquired an interest in the company or unit trust (subsubparagraph 2(1)(v)(B)).
For the purposes of subparagraphs (f)(iv) and (f)(v), money and a share in the company are not assets (subregulation 3). That is, the acquisition of these assets is not covered by these provisions.
Regulation 13.22D: When regulation 13.22B or 13.22C ceases to apply to an asset
This regulation specifies events that will render an asset of a small superannuation fund ineligible for the exception where they occur after the Division commences and after the superannuation fund has made the investment. That is, even if regulation 13.22B or regulation 13.22C applied, the exception will cease to apply if any of the events specified in regulation 13.22D occur.
The events are as follows:
- The number of members of the superannuation fund increases to five or more (paragraph (1)(a)).
- An interest in, or loan to, another entity becomes an asset of the company or unit trust (paragraph (1)(b)). This does not apply to a loan that is a deposit with an authorised deposit-taking institution within the meaning of the Banking Act 1959.
- The company or a trustee of the unit trust borrows money or gives, or allows to be given, a charge over, or in relation to, an asset of the company or unit trust (paragraph (1)(c)).
- The company or a trustee of the unit trust conducts a business (paragraph (1)(d)).
- The company or a trustee of the unit trust becomes a party to a lease or lease arrangement with a related party (paragraphs (1)(e) and (1)(f)). This does not apply to leases and legally binding lease arrangements for business real property.
- The company or a trustee of the unit trust is party to a lease or legally binding lease arrangement with a related party for an asset, where the asset ceases to be business real property (paragraph (1)(g)).
- The company or a trustee of the unit trust is party to a lease arrangement with a related party for business real property, where the lease arrangement ceases to be legally binding (paragraph (1)(h)).
- The company or a trustee of the unit trust becomes party to a lease or lease arrangement (with any party) in relation to an asset that is subject to a lease or lease arrangement with a related party (paragraph (1)(i)). This requirement does not apply to business real property.
- A related party of the superannuation fund becomes a party to a lease or lease arrangement (with any party) in relation to an asset that is subject to a lease or lease arrangement with the company, or a trustee of the unit trust (paragraph (1)0)). This requirement does not apply to business real property.
- The company or a trustee of the unit trust is party to a lease or lease arrangement (with any party) in relation to an asset that is subject to a lease or lease arrangement with a related party, where the asset ceases to be business real property (paragraph (1)(k)).
- The company or a trustee of the unit trust conducts a transaction other than on an arm's length basis (paragraph (1)(1)).
- The company or a trustee of the unit trust acquires an asset of a related party of the superannuation fund (paragraph (1)(m)). This does not apply if the asset is business real property acquired at market value.
- The company or a trustee of the unit trust acquires (from any party) an asset (apart from business real property acquired by the company or a trustee of the unit trust at market value) that has been an asset of a related party of the fund at any time since the later of.
- -
- 11 August 1999 (subparagraph 1(n)(i));
- -
- the day 3 years before the day on which the asset is acquired by the company or trustee of the unit trust (subparagraph 1(n)(ii)).
For the purposes of paragraphs (m) and (n), money and a share in the company are not assets (subregulation 2). That is, the acquisition of these assets is not covered by these provisions.
Subregulation 13.22D(3) ensures that if regulation 13.22B or 13.22C ceases to apply to an asset (the original asset) of a superannuation fund, neither regulation applies to any other asset of the superannuation fund that: was, or is, acquired by the fund at any time (including in the future); and is an interest in the company or unit trust.
This subregulation ensures that if an investment by a superannuation fund in a company or unit trust becomes ineligible for the exception from the in-house asset rules, all other investments made by the fund in the company or trust are also ineligible for the exception.
REGULATION IMPACT STATEMENT
The Superannuation Industry (Supervision) Act 1993 (the SIS Act) contains a number of rules governing investment activities by superannuation funds. Collectively, these rules are designed to limit the risks associated with superannuation fund investments and to ensure that superannuation savings are preserved until retirement and not accessed for current use. These reflect the objectives of the Government's retirement income policy.
The superannuation investment rules were amended by the Superannuation Legislation Amendment Act (No. 4) 1999 (SLAA 4 1999) to ensure that they meet their objectives.
SLAA 4 1999 amended Part 8 of the SIS Act (which limits investments into in-house assets to 5 per cent of fund assets) and section 66 (which prohibits the acquisition of assets from related parties). The SLAA 4 1999 amendments ensured that in-house assets included investments in related trusts.
SLAA 4 1999 contained concessions to ensure that small superannuation funds (with fewer than 5 members) can acquire business real property from related parties and lease business real property to related parties. These concessions recognise that land and buildings generally have an underlying value independent of the related party's business.
SLAA 4 1999 also allows a superannuation fund and a related party to jointly own property as tenants in common. A circumstance where this could be used is where the superannuation fund does not have sufficient funds on its own to purchase property. In the case of business real property, the property can be leased to a related party without counting as an in-house asset.
In addition to the arrangements outlined above, SLAA 4 1999 was amended to allow a class of assets specified in the regulations to be excepted from the in-house asset definition. The Government announced that this provision would be used to create a class of entity, which small superannuation funds and related parties could use to jointly invest in business real property.
An in-house asset of a superannuation fund is an asset of the fund that is a loan to, or an investment in ' a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party.
A related party of a superannuation fund is a member of the fund, a standard employer-sponsor of the fund, or an associate of a member or standard employer-sponsor. A related trust of a superannuation fund is a trust controlled by a member or a standard employer-sponsor (or associates).
A standard employer-sponsor of a fund is an employer that contributes to a fund on behalf of an employee, under an arrangement with the trustee of the fund.
Business real property is real property that is used wholly and exclusively in one or more businesses.
The above terms are defined in the SIS Act.
Tenancy in common is a form of co-ownership of land that allows two or more persons to have direct interests in the land, which can be disposed of separately.
Under the SLAA 4 1999 arrangements, a superannuation fund and a related party can jointly own property as part of a tenants in common arrangement.
However, some funds may prefer to hold joint investments in business real property through a company or trust. This would enable changes in ownership to take place by the sale of shares or units, rather than transferring direct ownership of the real property.
The broad policy objective is to provide increased flexibility for small superannuation funds in the way in which they hold business real property, while preserving the broader objectives in respect of retirement income policy.
The more specific policy objective is to provide a class of related companies and trusts, that can be used by small superannuation funds and related parties to jointly invest in business real property, without the investment by the superannuation fund being treated as an in-house asset.
Identification of Alternatives
The alternatives comprise the following.
Allow small superannuation funds to invest in related companies and trusts that can hold business real property, where the company or trust meets a specified list of conditions. The conditions are designed to meet the objectives of the investment rules. For instance, the exception will only apply if the company or the unit trust does not borrow (in the same way that superannuation funds are not permitted to borrow).
Do not provide an exception to the superannuation in-house asset rules.
The following groups will be affected by the proposed changes to the in-house asset rules.
Members, Employer-Sponsors and Trustees
For self managed funds, the trustees will also be the members and may also control the employer-sponsor.
The changes will provide the trustees of small superannuation funds with an alternative means to hold business real property.
Employer-sponsors will be able to lease business real property held in this way (as they currently can for business real property held direct by a small superannuation fund).
For members, this will represent an alternative form of investment for their superannuation savings.
The Australian Taxation Office (ATO) and the Australian Prudential Regulation Authority (APRA) would be required to monitor the exception.
There is a need to ensure that the option chosen is consistent with the objectives of the investment rules and the Government's retirement income objectives.
Costs and Benefits of the Proposed Options
Option 1 - Provide the exception to the Superannuation Investment Rules
Proceeding with the changes will provide small superannuation funds with an alternative means of jointly investing in business real property with a related party. This could provide advantages for funds in terms of flexibility and reduced costs not available under a tenants in common arrangement.
Members will benefit to the extent that gains are reflected in future superannuation benefits.
The increased flexibility of the arrangements may increase the scope for employer-sponsors to lease business real property financed by small superannuation funds.
The provisions will be consistent with the purpose of the investment rules, and therefore maintain the benefits to the community of the Government's retirement income policy.
Superannuation fund trustees seeking to invest in a related unit trust or company will need to determine whether that investment is exempt from the in-house asset rules under the new regulations. This will necessarily involve detailed ongoing knowledge of the activities of the related unit trust or company.
Fund auditors will be required to determine whether the regulations apply to an investment by a small superannuation fund in a related unit trust or company.
However, a fund will have the option of whether or not to use the concession, and can therefore judge whether the benefits outweigh the costs. It is not possible to quantify the number of small funds that will use the concession under the regulations.
The regulators will need to monitor the new arrangements.
Option 2 - Do not proceed with the exception
This option would mean small superannuation funds generally would not be able to jointly own business real property with related parties through a related company or trust (except up to in-house asset limit of 5 per cent of fund assets).
This would avoid the compliance and other costs as outlined above in option 1.
Small superannuation fund trustees would not have the same flexibility in owning business real property. This will affect members and employer-sponsors to the extent that they would otherwise have benefited from the new arrangements. This option will not affect those superannuation funds and their members who would not choose to use this structure in any case.
The Government has consulted with a range of accounting and other industry bodies in the development of these regulations.
Some submissions received during consultation advocated that the exception should apply to a related company or trust that undertakes a wider range of activities, such as investing in other entities that a superannuation fund could invest in. However, this would go beyond the objective of the exception, which is to provide a means of jointly holding business real property. Superannuation funds can hold interests in other entities directly.
Concerns were also expressed about the requirement for funds to determine whether assets had previously been owned by a related party of the fund. These provisions have been modified to take account of these concerns.
The regulations will provide small superannuation funds with increased flexibility in owning business real property jointly with members and employer-sponsors. It will be a matter for fund trustees/members to decide whether to use the new arrangements and incur any associated compliance costs. Accordingly, proceeding with the changes can be expected to provide net benefits.
The changes will be administered by the ATO and APRA after the commencement of the regulations. Monitoring take-up and compliance will be part of the ongoing monitoring of the small superannuation fund sector.