Issue
Has a contravention of subsection 71(1) of the Supervision Industry (Supervision) Act 1993 (SISA) occurred where a self managed superannuation fund (SMSF) has made an additional investment in a related trust after 11 August 1999?
Decision
Yes. A contravention of subsection 71(1) of SISA has occurred where the SMSF has made an additional investment of units in a related trust after 11 August 1999.
Facts
The SMSF and related trust were established before 11 August 1999 where the SMSF is the sole beneficiary of the trust. Both trusts have the same corporate trustee.
The related trust purchased and paid a deposit for real property 'off the plan' prior to 11 August 1999.
The SMSF received further units in related trust after 11 August 1999 after making an additional investment in the related trust.
The related trust intended to sell the property before settlement but was unable to find buyer. It then borrowed money to settle the purchase after subsequent issue of units to the SMSF.
The property is leased at arms length to an unrelated third party.
Reasons for Decision
Subsection 71(1) of the SISA provides that an in-house asset of a superannuation fund includes investments in a related trust.
Section 71A of the SISA exempts such an investment from being an in-house asset if it was acquired before 11 August 1999. An investment is also exempted if it was acquired after 11 August 1999, but where that acquisition was made under a contract that was entered into before that date. In both circumstances the investment must not have been an in-house asset under the former rules.
Further investments in the related trust after 11 August 1999 that are not in line with a contract entered into before that date will be treated as in-house assets unless specifically excluded by sections 71D or 71E of the SISA.
In this case, the fund had an investment as at 11 August 1999. The exception under section 71A of the SISA applies to this investment, meaning it is not an in-house asset.
The fund was then issued with further units after 11 August 1999.
The additional units were not acquired through a reinvestment of the trust distribution but rather, through an additional investment in the related trust.
Neither of the exceptions under section 71A or 71D of the SISA applies.
The investment by the related trust was not geared as at 11 August 1999 and there is no evidence of an election to apply section 71E of the SISA to the investment in the related trust. Therefore, the section 71E exception also does not apply.
The additional investment in the related trust after 11 August 1999 is therefore an in-house asset under the rules contained in section 71 of the SISA.