Issue
Will a self managed superannuation fund (SMSF) have an 'in-house asset' under section 71 of the Superannuation Industry (Supervision) Act 1993 (SISA), where the SMSF makes contributions to a related party under a contractual arrangement which funds the acquisition of an asset by the related party, and provides the SMSF with the right to receive payments as a return on the contributions made?
Decision
Yes. When an SMSF makes a funding contribution in exchange for contractually enforceable rights to receive payments from the related party, it has invested in a related party for the purposes of subsection 71(1) of the SISA.
Facts
Under a contract, an SMSF has contributed money towards the acquisition cost of an asset that is or has been acquired by the other party to the contract. The other party is a related party of the SMSF under subsection 10(1) of the SISA.
The contract stipulates that the related party controls and manages the asset and is entitled to all receipts from the asset. The contract also states that the SMSF shall not be required to guarantee or indemnify the repayment of any borrowings or other obligations of the related party.
The SMSF is entitled to receive payments from the related party under the contract. The amount of the payments is calculated as a proportion of the proceeds from sale, lease or other use of the asset. The relevant proportion relates the quantum of contributions made by the SMSF to the acquisition cost of the asset. The contract states that the SMSF acquires no legal, equitable or other interest in the asset.
The contributions of the SMSF are stated by the contract not to constitute a loan or to otherwise give rise to an obligation to repay an amount to the SMSF. The SMSF's pecuniary interest in the arrangement is limited to its entitlement to receive the contractual payments from the related party.
Reasons for Decision
An 'in-house asset' is defined in section 71 of the SISA as: ...an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund...
Subsection 10(1) of the SISA defines 'invest' to mean: (a) apply assets in any way; or (b) make a contract for the purpose of gaining interest, income, profit or gain.
Subsection 10(1) defines asset to mean: any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country).
The SMSF has made an investment. Money has been laid out in the acquisition of some species of property from which profit or interest is expected (Re Wragg, Wragg v. Palmer [1919] 2 Ch 58 at 64-65; Inland Revenue Commissioners v. Rolls-Royce Limited [1944] 2 All ER 340 at 341-342).
The investment is in a related party for the purposes of subsection 71(1) of the SISA as the investment confers an interest in any property of the related party (Trevisan & Another v. Commissioner of Taxation (1991) 29 FCR 157; 91 ATC 4416; (1991) 21 ATR 1649). The SMSF's contractual rights to payments from the related party, acquired in return for its funding contributions under the arrangement, are a chose in action enforceable against the related party. This chose in action constitutes an enforceable interest in the property of the related party.
As the SMSF has made an investment in a related party under the arrangement, the investment is an in-house asset under subsection 71(1) of the SISA.