From 30 June 2009, an "in-house asset" is any of:
Before 1999, only investments in and loans to standard employer-sponsors and their associates were included. However, the new definition (above) is much broader.
All superannuation funds are subject to limits on in-house assets. Generally, the limit is 5% of the market value of the fund's assets.
New legislation in December 1999, restricted related party investments for SMSFs. It applied from 11 August 1999.
A transitional period to 30 June 2009 applied to some of the changes. A summary is below.
Investing in related trusts? Including related trusts in the definition had a potentially major impact on self-managed funds. This is because investment through a unit trust had previously been a common way to invest in geared investments. Before the changes, it was generally accepted that the unit trust could borrow to finance the acquisition of an asset — even if all the units on issue were held by the superannuation fund's trustee (as long as a geared trust was an acceptable risk under the fund's investment strategy). The process worked liked this: SMSF trustees would aim to purchase an increasing number of units, or would make additional payments on partly paid units, and the loan in the unit trust would gradually be repaid from contributions to the fund and earnings of the unit trust.
Lease arrangements with related parties? These were also a common way of enabling the employer-sponsor (and other related parties of the fund) to use fund assets (such as property, but also including art work and other assets) under arm's length leasing arrangements. Again, the arrangements would always need to have been assessed in the context of the fund's investment strategy. The 1999 legislative changes significantly restricted this option. However, they continue to allow leases of business real property to related parties.
In 1999, the government recognised the changes were likely to have a severe impact on existing arrangements, so it allowed certain "grandfathering" rules and transitional provisions.
Pre 1999 arrangements OK: One of the grandfathering rules is that assets which were held before, or which were subject to contracts, loan agreements or leases which existed before, the 11 August 1999 changes can continue unaffected by the change.
June 2001 transition: A transitional measure delayed the new definition for arrangements entered into between the introduction and passing of the legislation, until after 30 June 2001. This concession is not discussed further as it is no longer current.
Other transitional measures apply until 2009. These are the measures on which trustees of SMSFs need to focus now.
Arrangements need to be made to ensure that the funds remain complying. The removal of the concessions will have a major impact on financing and other arrangements. The penalties for failure to comply are considerable and can include fines for the trustee and loss of complying status for the fund. Loss of complying status is a serious event resulting in a tax at 47% on the fund's assets (other than those representing undeducted contributions) and ongoing income tax at 47%.
Three concessions which will end in 2009 are:
Additional payments on partly paid shares and units
Additional capital payments on partly paid shares or units owned by the fund at 11 August 1999 and made up to 30 June 2009 are not in house assets. Any paid after 30 June 2009 are in house assets.
Additional units to replace debt
Additional acquisitions of units or shares in certain related geared trusts or companies up to 30 June 2009 are not in-house assets if the trustee chooses to adopt this concession (and that choice is recorded in writing). The exemption applies to new units acquired to replace borrowings of the trust or company (limited to the amount). This transitional arrangement is subject to restrictions, and cannot be used with the re-investment concession (see below) or the grandfathering rules relating to assets subject to a pre 11 August 1999 agreement.
Re-investment of income
Until 30 June 2009, income from a related trust can be re-invested in that trust — and will not be treated as an in-house asset. The same treatment applies to dividend re-investment in a company whose shares would otherwise be treated as in-house assets under the new definition and which would not have been in-house asset before the 1999 changes.
There are concerns that the long, 10-year period of transition may mean trustees will have forgotten, or will be unaware of, the need to address the 30 June 2009 deadline.
Some fund trustees:
Trustees who have investments in related unit trusts or companies which have outstanding borrowings need to review their position. If they are relying on re-investment or other additional capital injections under the transitional rules outlined above, then they need to consider whether the borrowings will be repaid by 30 June 2009.
If these financial arrangements are not on track, then the trusts or companies may need to consider alternative methods of funding repayments, or refinancing. In some cases, property may even need to be sold. Best use should be made of the available time to plan any exit strategy.
For more information, contact Julian Smith at Maddocks on 03 9288 0555.
Qualifications: BA, LLB, Deakin University
Sophie is a member of Maddocks Commercial team. She is a corporate and commercial lawyer with a particular focus on:
She regularly assists clients across multiple sectors including consumer markets (beauty and retail), industrial (manufacturing and distribution) and financial services. Her private sector clients include multinationals, private equity funds and founders.
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