Self-managed superannuation funds: "related party transaction" extends to marriage breakdown

An SMSF trustee can now acquire a superannuation interest resulting from a marriage breakdown without having to convert the assets to cash. (Previously, that acquisition has been prohibited under the 'related party transaction' rules.)
 

The broad rule prohibits "related party transactions"

The broad rule is that trustees of self-managed funds must not acquire assets from related parties. Those related parties include:

  • another member of the fund;
  • a standard employer-sponsor of the fund; and
  • certain associates of a fund member or of a fund standard employer-sponsor. The certain associates include any relatives, other members and trustees of the fund and directors of the fund's trustee company. These associates are known as "Part 8 Associates".

The broad rule is in Section 66(1) of the SIS Act [1]

The four notable exceptions

There are currently four notable exceptions to the broad rule. The exceptions allow the transaction:

  1. if the assets are listed securities
  2. if the asset is business real property acquired at market value
  3. if the asset is acquired as a result of a merger of two regulated funds.
  4. if the asset being transferred is cash.

These exceptions are in Section 66(2) of the SIS Act.

Also, the Tax Commissioner may create further exceptions.

Background to the new exception — the Family Law Act (FLA)

The FLA allows superannuation interests to be allocated between parties to a marriage. This may occur through an agreement or by order of the Family Court.

If a marriage breaksdown, then a spouse wishing to transfer or roll over their superannuation interests to another fund for the benefit of their partner, must do so in the form of a cash payment. This ensures that the current related party transaction rules in the SIS Act are not breached.

The new exception — thanks to the Tax Commissioner

The Tax Commissioner recognised that many small superannuation funds do not hold sufficient cash to make these "marriage breakdown" payments. In that light, the Tax Commissioner has created a new exception to the related party transaction rules in the SIS Act.

The new changes allow trustees of superannuation funds to transfer and acquire a spouses' interest in a superannuation fund without infringing the related party transaction rules of the SIS Act.

The conditions for the new exception to apply

The transfer allowed by the new change must be made on the following conditions:

  1. the asset must be acquired by the acquiring trustee for the benefit of a particular member of the acquiring fund; and
  2. the asset must be transferred or rolled-over from the trustee of another regulated super fund (transferring fund); and
  3. the asset must represent the whole, or part, of either:
    • that member's own interests in the transferring fund; or
    • that member's entitlements in a transferring fund, as determined under Part VIIIB of the FLA (pursuant to an agreement or court order concerning a marriage breakdown); and
  4. the transfer or roll over must occur as a result of that member's marriage breakdown.

More information

The exception is contained in the Tax Commissioner's determination dated 26 August 2006. You can read it there. Or for more information, you can call Julian Smith at Maddocks on 03 9288 0555.


[1] Superannuation Industry (Supervision) Act 1993 (Cth)