Professional Documents
Culture Documents
no trustee of the fund receives any remuneration in respect of duties or services performed as trustee in relation to the
fund.
See 10200 (steps in establishing a DIY fund) and 10310 (checklist for making investment decisions) for more details on
trustee requirements.
IMPORTANT POINT
The usual definition of "employee" is extended for the purpose of SMSF membership, so that a member who is employed by an
employersponsor of the fund may also be considered an employee of another person associated with that employersponsor.
The extended definition can include relatives, related companies, directors of the same company, trustees and beneficiaries of
the same trust, and partners in the same partnership.
This means that a fund will not be a SMSF if a member is employed by an employersponsor of the fund, and another member
(who is not a relative) is associated with that employersponsor. An example of this would be where the employersponsor is a
company of which another member is a director.
However, there are exemptions under the regulations (SIS Regulations reg 1.04AA):
directors of an employersponsor may be members of the same SMSF, and
if a member is both an employee and relative of another member, then they will not be taken to be an employee of any
other member of the fund.
Thus, the normal situation of a husband and wife in business is accommodated where they may both be members and
directors/trustees, notwithstanding that they are both employees of the employersponsor.
Acting trustees
A legal personal representative may act as a trustee or a director of a trustee company in a members place if the member (SIS
Act, s 17A(3)):
is under a legal disability
has provided an enduring power of attorney to the legal personal representative
has died (in this instance a legal personal representative may only act as trustee for the period from the members death up
to the commencement of the payment of death benefits).
If a member is under a legal disability because of age (ie a minor) and does not have a legal personal representative, the parent or
guardian of the member can be trustee in the place of the member.
An "acting trustee" can be appointed by the ATO where the ATO suspends or removes a trustee from a SMSF. A legal personal
representative of a person who is a "disqualified person" under SIS Act cannot act as trustee in that persons place (SIS Act s
17A(10)).
SMSF regulation
Small funds which meet the SMSF definition are regulated by the ATO and have specific exemptions and requirements under
the various provisions of SIS Act and the Tax Act see 10030 for a summary of these provisions.
SMSFs can be attractive due to perceived advantages over other types of funds, such as greater control, flexibility and
investment choice. The reality is, however, that in many instances Public Offer Funds offer features with the required level of
flexibility and choice, without the ongoing responsibilities and workload brought about by fund self management and
trusteeship.
The table below sets out the key differences in the regulation of SMSFs, SAFs and Public Offer Funds which should be
considered.
SMSF
Regulator
ATO
APRAprudential
regulation
Membership
Governing rules on
trustee obligations
Corporation
Corporation
Corporation or individuals;
No remuneration
May be remunerated
May be remunerated
Exemption from
requirement that trustee not
be subject to direction (SIS
Act s 58)
Exemption in regards to
binding death benefit
nominations (SIS Act s
59(1A)).
Exemption in regards to
binding death benefit
nominations (SIS Act s
59(1A)).
No access to Superannuation
Complaints Tribunal (SCT);
Access to SCT;
Access to SCT;
Active participation by
members/trustee.
Trustee responsible.
Trustee responsible;
Equal representation
provisions apply for
standard
employersponsored
funds.
Member directed
Yes within the terms of the
investment (SIS Act s
funds investment strategy.
52(4) and SIS Reg reg 4.02)
Exceptions from standard Acquisition of business real property Acquisition of business real
from related parties;
property from related
investment restrictions
parties;
(SIS Act, s 66, 67 and 69 to
85)
Acquisition of listed
securities. However no
specific exemption, see
10560.
Certain investments in
related nongeared trusts
and companies.
IMPORTANT POINT
SAFs have the same exemptions from prudential requirements and investment restrictions as SMSFs.
Regardless of the type of fund, the superannuation fund must always be maintained solely for one or more of the core, or core
and ancillary, purposes. Generally, the fund must be maintained to provide benefits for members retirement or, in the event of a
members death, benefits for their dependants (SIS Act s 62; see 10510).
Trustee duties
In all cases, fund trustees must meet fiduciary obligations, as well as act in accordance with the trust deed, provisions of the SIS
Act and all statutory requirements imposed under tax, trust or other relevant law. A trustee may authorise another person or
entity to perform various activities related to the operation of the fund, but the trustee cannot delegate its overall responsibility
for those activities.
Trustees must always act honestly, in the best interest of members, and ensure that all trust assets are kept separate from the
trustees personal or business assets. There must be an investment strategy, and strict investment rules must be adhered to
(1040010420). Trustees must ensure information is available to members to enable a proper evaluation of the funds
management and financial condition there are also strict record keeping requirements. In addition, administrative obligations
such as annual returns, RBL reporting, PAYG and, possibly, GST payments and reporting must be met.
Efficiency
In order to manage any fund efficiently, trustees need to monitor fund performance, giving sufficient consideration to risk,
diversification, liquidity and the funds ability to discharge its liabilities a task requiring time and expertise.
Trustees need to keep uptodate with legislation and have the relevant financial and management skills as well as time to run
the fund effectively.
Professional service providers may be needed to prepare the trust deed, financial accounts, tax returns and audit reports, as well
as consultants, managers or brokers to assist with fund investments and benefit design.
Costs
Any superannuation fund costs money to run, and often the level of costs involved will be a function of the
flexibility/complexity of the fund, the type and number of investments held and the number of transactions undertaken. SMSFs
are subject to less onerous reporting and account keeping requirements (see 10030) so they may incur fewer costs of this
nature compared to SAFs or Public Offer Funds. Larger funds, however, may have increased scope for distributing costs and
achieving economies of scale in administration and investments for example access to wholesale managed funds. The
decision as to which is the most costeffective option for a client will require analysis of their particular situation.
EXAMPLE
EXAMPLE 10.1 DIY FUNDS
The seven partners of the prestigious law firm, Never Won One and Associates, have recently set up their own superannuation
fund, Life Is Easy Super Fund. The trustees are all of the individual partners. The partners are not related in any way except for
their partnership responsibilities.
The Life Is Easy Super Fund will not be a SMSF or SAF because it has more than four members.
EXAMPLE
EXAMPLE 10.2 SELF MANAGED FUNDS
Mr and Mrs Jersey run a milk bar. They have established their own fund called the Jersey Pasture Retirement Fund. The trustees
are Mr and Mrs Jersey. The fund has two other members:
their daughter, Daisy, and
Pat, who the Jerseys employ to work in the milk bar, and whose SG contributions go into the fund.
The fund will not qualify as a SMSF because Pat is an employee of another member (ie both Mr and Mrs Jersey) and is not a
relative of either. The fund will need to appoint an APRA approved trustee or RSE licensee to meet the SAF requirements.
BT Super Book> CHAPTER 10 DIY SUPER > COMPLYING AND NONCOMPLYING FUNDS
[10170] Residency
As stated above, in order for a superannuation fund to be a complying superannuation fund, the fund must be a resident regulated
fund at all times during the financial year. This requirement can be an issue, particularly for SMSFs, where fund members move
or relocate overseas.
To satisfy the requirements as a resident superannuation fund, the fund must meet the requirements of ITAA 1936 s 6E(1):
the fund is a provident, benefit, superannuation or retirement fund at the relevant time, and
either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia, and
at the relevant time, the central management and control of the fund is in Australia, and
BT Super Book> CHAPTER 10 DIY SUPER > COMPLYING AND NONCOMPLYING FUNDS
if the fund has at least one resident active member (ie the accumulated entitlements of active resident members is 50% or
more of the total accumulated entitlements of all active members of the fund).
The concepts of "central management and control" (see 10180) and "active members" (see 10190) are crucially important
for a DIY in meeting the residency requirement.
BT Super Book> CHAPTER 10 DIY SUPER > COMPLYING AND NONCOMPLYING FUNDS
Forfeiture
Forfeiture clauses are generally inserted into trust deeds to protect members benefits in a number of circumstances, including
where a member becomes mentally unsound or historically where a member becomes bankrupt. Changes to the treatment of
superannuation benefits for bankrupts since 1 July 1994 have superseded the need for a forfeiture clause for this purpose (see
Chapter 13 for more details on bankruptcy and superannuation).
Another use of the forfeiture clause, known as the "forfeiture strategy", has on occasion been promoted and used in the
marketplace, predominantly for SMSFs. The strategy involves the fund trustee forfeiting a members benefits, often in excess of
the members RBL, to the funds reserve with the members consent. This reserve is subsequently reallocated to another
members account (often the spouse) where benefits are well within RBLs.
Minimum benefits have to be maintained in a superannuation fund until they are cashed, rolled over, or used to support an
income stream (SIS Regulations reg 5.08(1)).
From 12 May 2004 the use of forfeiture strategies for tax avoidance purposes by accumulation superannuation funds have been
prohibited by making all benefits in an accumulation fund "minimum benefits" (SIS Regulations reg 5.04(2)).
There are two new exceptions to the rules regarding the treatment of minimum benefits. These exceptions are to:
grandfather existing employee retention schemes where voluntary employer funded benefits only fully vest in an
employee after a certain period of employment. This exception only applies where there is a written agreement between the
fund member and their employer prior to 12 May 2004 (SIS Regulations reg 5.08(2)), and
enable a members minimum benefits to be cashed to provide for temporary incapacity where the amount is not
attributable to the members personal or employer contributions and their earnings (SIS Regulations reg 5.08(3)).
Temporary incapacity benefits can continue to be paid from an accumulation fund from voluntary employer funded or insured
benefits.
Covenants deemed included in the trust deed
The SIS Act (and Regulations) deem that a superannuation fund trust deed includes certain covenants, even if not specifically
stated. Any contrary provisions written into the funds trust deed will be overridden by these covenants. The covenants are (SIS
Act s 52):
acting honestly in all matters concerning the fund
acting with the same degree of care, skill and diligence as an ordinary prudent person dealing with property of another for
whom the person felt morally bound to provide in relation to the fund
ensuring that the trustees duties and powers are performed and exercised in the best interests of the beneficiaries
keeping the money and other assets of the fund separate from any money and assets of trustees and standard
employersponsors of the fund and associates
not entering into any contract, or doing anything else, that would prevent or hinder the trustee from properly performing
or exercising the trustees functions and powers
formulating and giving effect to an investment strategy that has regard to risk, diversification, liquidity, cash flow, and the
ability to discharge the funds liabilities
formulating and giving effect to an investment strategy and prudential management for the reserves of the fund consistent
with the entitys investment strategy and its capacity to discharge the funds liabilities, and
allowing a beneficiary access to any prescribed information or documents.
The governing rules of a regulated superannuation fund, which includes DIYs, must not permit those rules to be amended in
such a way that results in either the pensions basis or the corporations basis being contravened (SIS Act s 60; SIS Regulations
reg 4.05).
These provisions ensure that the fiduciary obligations of a trustee are not undermined by another party making amendments to
the rules of a fund to the possible detriment of fund members.
Trustee information requirements for members
The trustee of a superannuation fund is required to provide information to fund members. The information covered includes
information:
needed to understand benefit entitlements and the main features of the fund
to enable the person to make an informed judgement about a funds management and financial condition, and understand
BT Super Book> CHAPTER 10 DIY SUPER > MAKING INVESTMENT DECISIONS IN A DIY FUND
BT Super Book> CHAPTER 10 DIY SUPER > MAKING INVESTMENT DECISIONS IN A DIY FUND
It is a principle of law that applies to trusts that trustees have a duty to invest moneys held by the trust fund. The trust deed of a
superannuation fund provides the authority for an investment to be made subject to exceptions in the relevant Trustee Act and
the SIS Act (see below).
Trustees must know their powers of investment and investment restrictions under the trust deed. Most trustees who come to grief
simply do not look at the trust deed of the fund that they are responsible for. A trustee who breaches the terms of a particular
trust deed will be liable to beneficiaries for damages in the event losses are suffered.
Trustees must also remember that investment decisions have to be exercised in a proper manner for the benefit of fund members.
This should be kept in mind when investments are made which could be considered speculative.
The Trustee Act
Each state and territory has a Trustee Act. The Acts are very similar but do vary between each state and territory. The Trustee
Act in each state and territory may authorise certain investments provided the investment is not prohibited under a particular
trust deed and it is not prohibited under the SIS Act. You should always obtain legal advice before relying on any Trustee Act to
ensure that no breach of trust occurs.
The regulators
It is the duty of the regulators of superannuation funds the ATO and APRA to ensure that trustees comply with the laws
under which they are regulated. As part of this process, both regulators regularly issue clarification and interpretation of their
views of the practical application of the laws. For example, APRA and the ATO distribute APRA Superannuation Circulars,
Trustee Newsletters and Guidelines as a means of communicating to trustees their approach to administering superannuation
laws. Trustees of DIY funds should be familiar with these publications and the views of the regulators on the various SIS
provisions dealing with fund investments.
The courts
It is possible for the trustee to apply to the court to approve an investment. The court (normally the Supreme Court of each state
and territory) has the power to approve applications for investments made by trustees. Due to the cost involved, this avenue is
normally only used where a significant issue is in question and the trust deed is silent or ambiguous.
The court will not authorise investments that are prohibited by the trust deed, the Trustee Act or other legislation. The court will
obviously take into account the impact upon the beneficiaries of that particular fund to ensure the investment is in their best
interests.
Another way in which the courts influence the investment activities of DIY fund trustees is by passing judgment on compliance
with the law as it relates to those activities in particular cases. A notorious example is the Swiss Chalet case, which is
summarised in Example 10.5 in 10510.
The SIS Act and Regulations
SIS sets down a number of:
covenants or standards that trustees are expected to follow (breaches of these covenants or standards can lead to criminal
sanctions or penalties or even a damages action if loss is suffered), and
restrictions on making certain types of investments and undertaking certain investment activities.
Covenants and standards
Certain covenants are treated as being part of the particular regulated superannuation funds trust deed. Regardless of whether
the covenants are actually written into the deed, they are deemed to apply (SIS Act s 52) see paragraph 10200 step 2.
Investment restrictions
The restrictions imposed by the SIS Act are both general and specific in nature, providing broad guidelines on a trustees
investment activities as well as particular prohibitions. These restrictions are dealt with at 1050010560.
INVESTMENT STRATEGIES
[10400] The requirements
Investment of members entitlements by superannuation fund trustees is one of the most important issues affecting the
superannuation industry. The ability of superannuation fund trustees to make adequate returns on moneys invested by employers
and members is vital. The making of appropriate investments by superannuation fund trustees depends on a number of factors
including:
skill and knowledge of trustees
independent advice taken, and
the setting of adequate objectives and strategies.
As stated earlier, it is a SIS requirement that superannuation funds must formulate and give effect to an investment strategy (SIS
Act s 52(2)(f); SIS Regulations reg 4.09).
The trustee, in setting a strategy, must take into account the following:
risk and return the risk involved in making, holding and realising investments and the likely return from the
investments, having regard to the funds objectives and its expected cash flow requirements
diversification the composition of the funds investments as a whole, including the extent to which the investments are
diverse or involve the fund being exposed to risk from inadequate diversification
liquidity the liquidity of the funds investments having regard to its expected cash flow requirements, and
liabilities the ability of the fund to pay member benefits and other liabilities, both current and prospective.
A trustee could implement an investment strategy to invest in one class of asset, or even one single asset (say a property)
provided it could demonstrate it has considered the suitability of the strategy in light of the above issues.
Set a strategy to achieve the investment objectives. This is the means employed to achieve the stated investment objective. It
should detail the types of assets that may be used to achieve the objectives and the asset allocation ranges and benchmarks.
Monitor the objective and strategy. The trustee should regularly monitor the performance of the fund against stated objectives.
This is one area which trustees of DIY funds do not generally focus on. It is important to measure the funds performance in
light of its investment objectives and market conditions.
INVESTMENT RESTRICTIONS
[10500] SIS Act imposes restrictions
The provisions of the SIS Act set down minimum standards for investments of a superannuation fund, mainly concentrating on
prescribing investments that a fund cannot invest in or applying conditions for a particular type of investment. The major
restrictions that SIS imposes are:
the sole purpose test (see 10510)
borrowing restrictions (see 10520)
the prohibition on lending or financial assistance to members or relatives (see 10530)
inhouse assets limits (see 10540), and
a requirement to make arms length investments (see 10550)
acquisition of assets from related parties (see 10560).
All of the restrictions above are classified as civil penalty provisions (SIS Act s 193) and can carry substantial civil and possibly
criminal penalties if they are breached. Penalties are imposed by the court upon consideration of whether there has been a
contravention and its seriousness (see 10800).
shares in a company which came with the right to play golf and was used for private purposes
a Swiss chalet which was used by family members, and
a beach house that was used for personal family purposes.
The Tribunal considered that the fund had not been maintained for the sole purpose of providing superannuation benefits. This
was because, even though professional advice was taken about the assets and they had some income and growth potential, there
was also a purpose of providing benefits to the family group and their friends.
The decision in Swiss Chalet was recently applied by the ATO in ATO ID 2004/249. In ATO ID 2004/249, the SMSF invested
in art work, the art work was displayed in the home of a member at no cost to the member. The ATO determined that the work
of art displayed in the SMSF members residence at no cost to the member was a breach of the sole purpose test.
IMPORTANT POINT
While the regulators look closely at investments in assets such as beach houses, yachts, motor vehicles, artworks and other
collectables, technically a fund may be able to invest in such "exotic" assets. However, the trustees must demonstrate that they
have considered the purchase of the asset on its capacity to provide retirement benefits to members and its investment merits,
and that they consider it able to provide reasonable returns at a level of risk appropriate to the members of the fund.
Where a properly considered and soundly based investment provides "incidental" advantages to members, additional care must
be taken to ensure there is no suggestion that the fund is being maintained, in whole or part, for an improper purpose. For
example, the "exotic" assets could be stored in a storage room, facility or deposit box to make it a more acceptable investment.
Nonetheless, it would be prudent to limit the value of these "exotic" assets to a small portion of the total value of the fund.
assistance to members
the charge is required to secure the performance of the trustees obligations in relation to the derivatives contract
the charge is required under the rules of the specified exchange, and
the investment to which the charge relates is in accordance with the trustees Risk Management Statement which must
outline the policies for use of the derivative, restrictions and controls and the compliance processes.
Derivatives should not be used for "speculation". APRA Superannuation Circular II.D.7. states that speculation can mean
different things to different people. The Circular defines speculation to mean investment activity which results in one or more of
the following:
the net exposure of the fund to an asset class (eg Australian equities) being outside the limits set out in the funds
investment strategy. (Net exposure is exposure taking account of both physical and derivative exposure.)
the risk involved for the whole portfolio being outside that which the trustees considered appropriate when they
developed and approved the funds investment strategy
the fund holding "uncovered" derivatives
the funds total portfolio being "geared up" through derivatives to circumvent the limitations imposed by s 67, 95 and 97
of the SIS Act on borrowings.
This area of superannuation investment is complex and trustees should seek specialist advice when considering derivative
investments.
Instalment warrants
On 16 December 2002 the regulators released guidelines covering investments in instalment warrants via shareholder
application. The regulators formed the view that an investment in instalment warrants via shareholder application normally
involves charging of a funds asset and, therefore, the regulators generally consider these types of investments as inappropriate
for a funds investment strategy.
As a transition to these new guidelines, the regulators will not take any action against trustees that have invested in instalment
warrants using shareholder applications before 16 December 2002 provided the transaction is finalised by 16 December 2003 or
at the next reset date, whichever occurs first.
There is generally no restriction on investment in instalment warrants by way of cash application, however, the regulators have
cautioned trustees that have invested, or are considering investing in instalment warrants that they must:
consider the appropriateness of instalment warrants in the context of the funds whole investment strategy
ensure that they are familiar with the risks involved in the use of instalment warrants and have in place adequate risk
management procedures to manage the risks associated with these investments prior to making the investment, and
ensure that an investment in a particular instalment warrant series does not constitute a borrowing or involve charging of
an asset.
APRA has dealt with this issue in APRA Superannuation Circular II.D.2. The Circular identifies examples that would or would
not constitute financial assistance.
Examples of situations in the Circular that could be considered financial assistance are:
guarantees against trust property given by the trustee of the fund for the private loan of members, or
charging fund assets for the benefit of members.
Examples of situations considered in the Circular that do not constitute financial assistance are:
a fund investing on commercial terms in a nonassociated entity which, in its own right and from its own resources,
makes loans to members of the fund
the payment of benefits under the ancillary purpose provisions of SIS Act s 62, provided they are paid in accordance with
the SIS payment standards.
The term "financial assistance" is not defined in the SIS Act. The term has been considered in another statutory context. Part 2J.3
of the Corporations Act and its predecessors dealt with a company providing financial assistance for the acquisition of its own
shares. It is clear from the interpretation of this section that:
the financial assistance does not necessarily need to be of detriment to the company (ie it is not relevant that the fund
makes a profit on the transaction), and
the assistance can be direct or indirect.
Trustees of DIY funds must ensure that transactions entered into with members, or entities connected with the members, do not
constitute direct or indirect financial assistance. Trustees should make sure that any such transactions are entered into with
normal commercial terms and standard checks being undertaken and are consistent with the funds documented investment
strategy.
and
investments in nongeared companies or unit trusts that meet certain requirements including (SIS Regulations reg 13.22C
and 13.22D):
the company or trust does not borrow or allow a charge over any assets
it does not invest in or loan money to individuals or other entities (other than ADIs)
it has not, since 11 August 1999, acquired an asset from a related party of the fund, or that was owned by a related
party in the previous three years (not including ownership prior to that date), other than business real property
it does not lease assets, directly or indirectly, to related parties other than business real property
it does not conduct a business, and
all transactions are on an arms length basis.
IMPORTANT POINTS
A small business owner with a DIY fund effectively has a choice of two options for the purchase of business real property:
through their DIY fund using the inhouse assets exemption on business real property or through their small business (whether
in their name or through their company or trust). A disadvantage with the first option is that no small business capital gains tax
concessions on the sale of the property will be available (as outlined in Chapter 8 on CGT exemption).
However, there may be an advantage in holding the property in the superannuation fund over a company, as no CGT discount is
available in the company and it can be difficult to get the sale proceeds out of the company in a tax effective manner.
The ability of a fund to invest 100% of its assets in business real property must be considered in light of the funds investment
strategy. Not only must the strategy permit investment in business real property, but the trustees must also have in mind the
issues to be considered in setting the investment strategy. The requirement to consider diversification of assets may seem in
conflict with the total fund invested in one asset. Such conflict has not been tested in the courts, and the views of the regulators
are not clear.
Consideration must also be given to funding the acquisition of business real property; note that a complying superannuation fund
cannot borrow (see 10520 borrowing restrictions).
Finally, if the fund has two or more members, investment in a single asset such as real property can be problematic when it
comes to paying benefits to members. In order to pay a benefit to one member, the asset may have to be liquidated, giving rise to
timing issues and potential tax liabilities.
Transitional rules
There are a number of transitional arrangements for superannuation fund assets existing prior to 11 August 1999 (the date
legislation was introduced to broaden the definition of inhouse assets) or between 11 August 1999 and 23 December 1999
(when the legislation received Royal Assent) (SIS Act s 71A71F).
Inhouse asset rules originally applied to the assets of a fund that were loans to, or investments in, a "standard
employersponsor" of the fund and limited to 10% of the fund.
An asset of a fund is exempt from the inhouse asset rules if, after 11 August 1999, the asset consisted of a:
loan or an investment made on or before 11 August 1999
loan or an investment made after 11 August 1999 which was made under a contract entered into on or before 11 August
1999
share or unit in a unit trust which was acquired on or before 11 August 1999, or
share or unit in a unit trust made after 11 August 1999 that was made under a contract entered into on or before 11 August
1999.
These exemptions only apply if the asset would not have been an inhouse asset before 11 August 1999.
Pre11 August 1999 leases and lease arrangements
A lease or lease arrangements between the trustee and a related party of the fund which commenced before 11 August 1999 and
continues to be subject to an uninterrupted sequence of leases and lease arrangements between the trustee and a related party is
exempt from the inhouse asset rules. Assets subject to leases or lease arrangements that are enforceable by legal proceedings
which were entered into before 11 August 1999 and which came into force afterwards are also exempt.
Reinvestments
Reinvested earnings are exempt from the inhouse assets of a fund if the fund had originally invested in a related company or
trust on or before 11 August 1999 and makes further investments of these reinvested earnings in the related company or trust
between 11 August 1999 and 30 June 2009.
However, any reinvested earnings after 30 June 2009 in the related company or trust will be considered an inhouse asset.
Geared investments
Any investment or loan of a DIY fund in a related company or unit trust made between 11 August 1999 and 30 June 2009 is
exempt from the inhouse asset rules if the total amount of the additional investments or loans does not exceed the amount of
the company or trusts liabilities (other than debts to the SMSF) as at 11 August 1999. This exemption only applies if the SMSF
had an investment or loan in the related company or trust as at 11 August 1999 and that was not an inhouse asset at 11 August
1999.
For a fund to use this exemption, a written election must have been made by 22 December 2000 stating that the fund intends to
use this exemption. If this election was made, no other exemptions will apply except those exemptions applying to leases and
lease arrangements.
If this election has not been made, and subject to the above exemptions, any additional investments in the related company or
trust are an inhouse asset from 11 August 1999.
Antiavoidance provisions for inhouse asset rules
The SIS Act has antiavoidance provisions to combat arrangements to artificially reduce the level of inhouse assets in a
superannuation fund. One antiavoidance measure allows a regulator to determine that an asset is an inhouse asset where there
is an arrangement in place to overcome the inhouse asset restrictions (SIS Act s 71(2), 71(4)).
Further, the regulator may determine that a person who is not a standard employersponsor of a fund may be taken to be a
standard employersponsor of a fund, and therefore a related party (SIS Act s 70A(1)).
Another measure is the prohibition of schemes designed to artificially reduce the market value ratio of a funds inhouse assets.
If a scheme was entered into with the intention of avoiding the application of the inhouse asset rules, it is treated as a civil
penalty provision (SIS Act s 85).
INSPECIE TRANSACTIONS
[10600] Inspecie contributions
Members and other related parties may make inspecie contributions to a fund using the following assets.
Listed securities
Listed securities can be acquired from a member provided market value is attributed to the asset (ie if the acquisition was an
inspecie contribution then the security should be recorded at market value at the date of transfer).
A listed security is a share, unit, bond or debenture, right or option or any other security listed for quotation on the official list of
a licensed market in Australia (eg a stock exchange of Australia), an approved stock exchange listed in ITR 1936 Schedule 12 or
an exempt exchange under Corporations Act 2001 s 791C.
Business real property
Business real property includes any:
freehold or leasehold interest of the entity in real property
interest in Crown land that is capable of assignment or transfer and is not a leasehold interest, or
class of real property prescribed by regulations
where the real property is used wholly and exclusively in one or more businesses, whether carried on by the fund or not.
Business real property does not include any interest held in the capacity of beneficiary of a trust estate (SIS Act s 66(5)).
The businesses do not have to be operated by the related party from whom the fund is acquiring the asset.
The question of what constitutes business real property can depend upon the facts of the particular case, and APRA
Superannuation Circular II.D.3 paragraph 20 provides some clarification:
"Property that meets this definition includes land on which business is conducted (eg shop or factory) and land that is the
subject of a business (eg land held by a property developer for development or redevelopment, or in the process of being
developed or redeveloped). The question of whether rental property owned by a related party is business real property
that can be acquired by the trustee will depend on the facts of the case. Generally speaking, a single residential rental
property will not be treated as business real property unless it forms part of a business of owning and leasing residential
property."
"Business" includes professional services and primary production (which specifically allows a farm to be classed as business real
property, even where part of the farm contains a private home) (SIS Act s 66(6)).
Inhouse assets
SIS allows the trustee of a superannuation fund to invest a certain percentage of the funds assets in inhouse assets. The trustee
can acquire from a related party any investments that can be held by the fund under the inhouse asset rules, provided the
acquisition is at market value. Therefore, if the investment is an inhouse asset or is subject to the transitional arrangements in
SIS Act Pt 8D or is covered by any of the exceptions in SIS Act s 71(1), the investment may be acquired from a related party
(10540).
Assets transferred to a superannuation fund as inspecie contributions must always be transferred at current market value.
IMPORTANT POINT
Where business real property is transferred into a DIY fund as a deductible employer contribution, rather than as a cash
contribution, the inspecie contribution is likely to attract fringe benefits tax. The exemption for deductible contributions under
the Fringe Benefits Tax Act 1986 only exists where the contribution is in the form of "money" (FBTA Act s 136(1), definition of
"fringe benefit").
TIP
SIS Act s 71(1)(h) provides an exception to the inhouse asset rules for investments in widely held trusts. As s 66 allows a fund
to acquire assets of this nature from a related party, a clients managed funds could be used to make inspecie personal
contributions to their DIY fund.
EXAMPLE
FUND RESERVES
[10650] What are reserves?
Reserves are amounts set aside within a superannuation fund. They are unallocated moneys and do not form part of any
individual members account and may build up in value over time. Superannuation funds can maintain reserves if their trust deed
allows it.
If the trustee intends to maintain reserves, SIS Act s 52(2)(g) states:
"if there are any reserves of the entity to formulate and to give effect to a strategy for their prudential management,
consistent with the entitys investment strategy and its capacity to discharge its liabilities (whether actual or contingent)
as and when they fall due."
The trust deed determines what types of reserves are allowed and how they can be used. If reserves are used, the trust deed must
not have a provision prohibiting the maintenance of reserves (SIS Act s 115).
The funds allocated to reserves can arise from the following:
unallocated contributions (see Important Point below)
undistributed investment earnings
forgone or forfeited benefits (minimum benefits cannot be forfeited; see 10200, step 2)
transfer of reserves from another fund.
IMPORTANT POINT
From 12 May 2004 trustees of accumulation superannuation funds that receive a contribution in a given month are to allocate
that contribution to a member of the fund within 28 days after the end of the month or, if it is not reasonably practicable to do so,
within a longer period as is reasonable in the circumstances (SIS Regulations reg 7.08).
It should be noted that this will not prevent the transfer of administration costs from an administration reserve account provided
the contribution is first allocated to a member of the fund.
EXAMPLE
EXAMPLE 10.7 INVESTMENT RESERVES
A twomember superannuation fund has $800,000 in assets. Each member has a 50% beneficial interest in these assets.
If the actual investment return of the fund is 10% (ie $80,000), and the trustees determine a crediting rate of 5%, then the
members will have 5% (ie $20,000 each) credited to their accounts. The remaining 5% ($40,000) is allocated to the investment
reserves.
These reserves can be dealt with at the trustees discretion subject to the trust deed.
BT Super Book> CHAPTER 10 DIY SUPER > PAYING PENSIONS FROM A DIY FUND
BT Super Book> CHAPTER 10 DIY SUPER > PAYING PENSIONS FROM A DIY FUND
Further, the member must become entitled to be paid the defined benefit pension before 31 December 2005 and the first pension
payment must be made within 12 months after the day the member became entitled to be paid the pension.
The disadvantages in using DIY funds to pay pensions include the increased paperwork and complexity for the
members/trustees, eg dealing with tax compliance and maintaining bank accounts to facilitate pension payments (10710). This
is particularly the case as the members/trustees age. It may be more appropriate to use a wrap or public offer fund where all
these issues are handled in the one product so the member does not have to be concerned with these complex issues.
BT Super Book> CHAPTER 10 DIY SUPER > PAYING PENSIONS FROM A DIY FUND
PENALTIES
[10800] A penalty unit
Penalties may be imposed by a court of law if the relevant provisions are breached. A penalty may be a fine or a term of
imprisonment. Fines are specified as a number of penalty units. A penalty unit currently equates to $110 for an individual and
not greater than five times the individual penalty unit for a corporation.
The trustee against whom a civil penalty order is made, or who is convicted of an offence in the relation to the strict or fault
liability provisions, will generally be disqualified from acting as a trustee of a superannuation entity (SIS Act s 121).
a disqualified person acting as trustee (SIS Act s 121). Note that failing to inform the regulator that a trustee has become
disqualified is an offence of strict liability (SIS Act s 121(3)).
It has to be proved beyond reasonable doubt that the trustee committed the breach knowingly, intentionally or recklessly. The
maximum monetary penalty for an individual ranges from 102,000 penalty units ($1,100$220,000) or five times that for a
corporate trustee, or a term of imprisonment of up to five years.