Issue
Has a contravention of section 109 of the Superannuation Industry (Supervision) Act 1993 (SISA) occurred where an investment of a unit trust was not maintained on an arm's length basis?
Decision
No contravention of section 109 of the SISA has occurred, as that section does not apply to the investments of a unit trust. However, it may be possible that paragraphs 52(2)(c) and (f) of the SISA have been contravened.
Facts
A self managed superannuation fund (SMSF) owns 100% of the units in a related unit trust.
The trustees of the unit trust and a related family trust are the same trustees as for the SMSF.
The related unit trust was owed rent by the related family trust under a leasing agreement entered into between the trustees of the unit trust and the family trust.
The debt owing was written off by the related unit trust.
Reasons for Decision
Section 109 of SISA requires that the trustee of a regulated superannuation fund must make and maintain its investments on an arm's length basis. Paragraph 109(1)(b) of the SISA states that the trustee of a superannuation entity must not invest in that capacity unless:
'both: (i) the trustee or investment manager, as the case may be, and the other party to the relevant transaction are not dealing with each other at arm's length in respect of the transaction; and (ii) the terms and conditions of the transaction are no more favourable to the other party than those which it is reasonable to expect would apply if the trustee or investment manager, as the case may be, were dealing with the other party at arm's length in the same circumstances.'
The transaction in question occurred between the unit trust and the family trust, and as the provisions of the SISA do not cover the investment activities of a unit trust, the transaction is outside the jurisdiction of the SISA. Therefore, no contravention of section 109 of the SISA has occurred.
Paragraph 52(2)(c) of the SISA requires trustees to act in the best interests of beneficiaries and paragraph 52(2)(f) of the SISA requires trustees to formulate and give effect to an overall investment strategy for a fund. It must take into account the whole of the circumstances of the fund including, but not limited to, risk and return from the investments, diversity, liquidity and the ability of the fund to discharge its existing prospective liabilities. A trustee investing in a related trust will need to have proper regard to the fund's written investment strategy.
Further a trustee is required to comply with section 62 of the SISA to ensure that a fund is being maintained for one or more the purposes specified in section 62 (sole purpose test). An investment in a unit trust, which was known to be providing "free rent" to a fund beneficiary, would contravene section 62 of the SISA.