Issue
Where two or more self managed superannuation funds have a pre 11 August 1999 investment in the same related unit trust, can each fund individually invest up to the level of debt held by the related unit trust as at 11 August 1999?
Decision
Yes, each superannuation fund can individually invest up to the level of debt held by the related unit trust as at 11 August 1999.
Facts
A self managed superannuation fund (SMSF) had invested in a related unit trust prior to 11 August 1999.
The SMSF was one of seven unit holders in the related unit trust. One of the other unit holders was also an SMSF.
The SMSF has made a written election that it is to make further investments after 11 August 1999 into the related unit trust under the provisions of section 71E of the Superannuation Industry (Supervision) Act 1993 (SISA).
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 asset 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, under a contract 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 one of the transitional rules contained in the SISA. The transitional rules allow for additional investments in existing related party assets in certain limited circumstances.
Section 71E of the SISA, allows for a superannuation fund with fewer than 5 members, that had invested in a related company or trust prior to 11 August 1999, to make additional investments into the related company or trust up to the level of debt (to entities other than the superannuation fund) held by the related company or trust as at 11 August 1999.
If a small superannuation fund has made an election under paragraph 71E(1)(e) of the SISA in relation to an investment held at 11 August 1999 in a related company or trust, that superannuation fund can make further investments up to 30 June 2009 in the related company or trust up to the level of debt held by the related company or trust as at 11 August 1999. However circumstances may exist whereby two or more small funds have a pre 11 August 1999 investment in the same related company or trust.
Can each fund invest up to the level of debt held by the related company or trust, or is the level of debt apportioned between each share holder or unit holder based upon each investors' percentage of holdings?
The amending legislation that introduced section 71E of the SISA and the explanatory memorandum behind the amending legislation both refer to a superannuation fund in the singular. It was not envisaged that two or more superannuation funds may both have an investment in the same related company or trust. The legislation, as enacted, relates to an individual fund with a pre 11 August 1999 investment in a related company or trust, and the ability of that individual fund to make additional investments in the related company or trust, irrespective of whether other small superannuation funds may have an investment in the same related company or trust.
Accordingly, in a circumstance where two or more small superannuation funds have a pre 11 August 1999 investment in a related company or trust and each or all of the small superannuation funds have elected that section 71E of the SISA is to apply, then each or all of the small superannuation funds can individually invest up to the level of debt held by the related company or trust that existed as of 11 August 1999.