Preamble
A dividend or trust distribution is 'received' before the end of 30 June 2009 for the purposes of paragraph 71D(d) of the Superannuation Industry (Supervision) Act 1993 (SISA) [1] if the dividend or trust distribution is paid to the self managed superannuation fund (SMSF) by the company or trust respectively on or before 30 June 2009. A dividend or trust distribution is not received by an SMSF if the SMSF is only entitled to the dividend or trust distribution.
The time when a dividend or trust distribution amount is paid to the SMSF depends on the payment option that is either chosen by the SMSF or prescribed by the company or trust respectively.
If a dividend or trust distribution amount is to be paid by way of direct credit to a nominated account with a financial institution, it is paid and received by the SMSF when the amount is credited to that account. However, if the amount is paid by way of cash or cheque, it is received by the SMSF when the cash or cheque is either collected or, if posted, actually received by the SMSF. It is not necessary for the cheque to be presented or cleared.
If the dividend or trust distribution amount is to be applied or dealt with in some way on behalf of the SMSF, it is received by the SMSF as soon as it has been applied or dealt with as requested.
This Determination applies to SMSFs [2] and former SMSFs. [3] References in the Determination to SMSFs include former SMSFs unless otherwise indicated.
This Determination applies both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.
Appendix 1 - Examples
At the end of 11 August 1999 (test time) the P&J SMSF owned fully paid units in the P&J Unit Trust (unit trust), a related trust of the SMSF. The SMSF has taken up the option to have all trust distributions automatically reinvested in additional units.
Trust distributions totalling $20,500 have been applied by the unit trust on behalf of the SMSF as payment for the purchase of further units by the SMSF in the unit trust during the period 12 August 1999 to 30 June 2008. These trust distributions represent the total of all distributions made to the SMSF by the unit trust in that period.
At the end of 30 June 2009 the SMSF is entitled to a trust distribution of $5,000 but the amount has not yet been appropriated on behalf of the SMSF for the purchase of further units in the trust. The distribution is not received by the SMSF at the end of 30 June 2009. If this $5,000 distribution is applied to acquire further units in the unit trust, the units will be in-house assets of the SMSF under subsection 71(1). [4]
At the end of 11 August 1999 (test time) the G&D SMSF owned fully paid units in the G&D Unit Trust (unit trust), a related trust of the SMSF.
Trust distributions totalling $10,000 have been invested by the SMSF in acquiring units in the unit trust during the period 12 August 1999 to 30 June 2007. These trust distributions represent the total of all distributions made to the SMSF by the unit trust in that period.
On 30 September 2007 the SMSF invested a further $2,000 in the unit trust. Although the SMSF expects to receive a trust distribution in excess of this amount in the near future, at the time of making the further investment it has not received any further distributions. Therefore the total amount invested in the unit trust exceeds the trust distributions received by $2,000. The additional investment is not excluded as an in-house asset by section 71D and therefore, is an in-house asset of the SMSF.
On 30 November 2007 a trust distribution of $3,000 is paid by way of direct credit to the SMSF's nominated bank account. The SMSF invests $1,000 of that distribution in acquiring further units in the unit trust. At that time trust distributions total $13,000 and the further investment by the SMSF in the unit trust during the relevant period totals $13,000. Thus the investment of $2,000 made on 30 September 2007 is excluded from being an in-house asset of the SMSF when the $3,000 is paid into its bank account. [5] The $1,000 invested from the 30 November 2007 distribution is also excluded from being an in-house asset of the SMSF at that time.
Appendix 2 - Explanation
The in-house asset rules are one of the ways in which the SISA regulates the investments of superannuation funds. The in-house asset rules limit the extent to which a fund can invest in related parties. These rules were amended to extend the definition of 'in-house assets'. [6] However, as a transitional measure certain assets that would otherwise be included under the extended definition of in-house asset are excluded. This Determination concerns section 71D, a transitional provision which excludes certain investments in related entities made on or before 30 June 2009 from being in-house assets. Investments excluded under section 71D at the end of 30 June 2009 continue to be excluded from being in-house assets of the SMSF after that date. Investments in related entities made after 30 June 2009 are not excluded from the in-house assets of an SMSF under section 71D.
If an SMSF has made an investment (the original investment) in a company or trust on or prior to 11 August 1999 (the test time), [7] section 71D may exclude from the in-house assets of the SMSF further investments it makes in that entity during the period (the relevant period) beginning 12 August 1999 and ending at the end of 30 June 2009. Paragraph 71D(d) provides for the maximum amount that can be invested in the company or trust that ensures exclusion of the further investment from being treated as an in-house asset. [8]
Under paragraph 71D(d), the total amount invested in the company or trust during the relevant period must not exceed the sum of the amounts 'received' by the SMSF as dividends or trust distributions during that period in respect of the original investment or further investments in that entity.
Practically speaking, an SMSF satisfies paragraph 71D(d) if it reinvests some or all of the dividends or trust distributions it has received from the company or trust during the relevant period. However, if the SMSF makes additional investments in the company or trust over and above the total of all of the dividends or trust distributions it has received during the relevant period, paragraph 71D(d) is not satisfied in relation to the additional investments. That additional investment is an in-house asset of the SMSF if it otherwise satisfies the definition of in-house asset in subsection 71(1) (that is, it is an investment in a related party or a related trust). [9]
It is necessary to apply the threshold test in paragraph 71D(d) whenever a further investment is made by the SMSF in the company or trust during the relevant period. Any further investment is not excluded from being an in-house asset to the extent that it is in excess of the total amounts 'received' by the SMSF as dividends or trust distributions up to the time of investment. However, a further investment to which section 71D does not initially apply may later satisfy the threshold test in paragraph 71D(d) once additional dividends or trust distributions are 'received' from the company or trust during the relevant period.
Thus, to determine if paragraph 71D(d) is satisfied in relation to a further investment in a company or a trust during the relevant period, it is necessary to identify when a dividend or trust distribution is 'received' by the SMSF.
The term 'received' is not defined in the SISA. It is the Commissioner's view that for a dividend or trust distribution to be 'received', it must be paid to the SMSF. In contrast, a dividend or trust distribution to which the SMSF is only entitled is not 'received' by the SMSF for the purposes of paragraph 71D(d). This view is supported by the Explanatory Memorandum accompanying the Bill [10] that inserted section 71D into the SISA. The Explanatory Memorandum (EM) makes it clear that it was Parliament's intention that 'received' means 'paid to'. The EM explains that: The term received for the purpose of section 71D means paid to the superannuation fund. For the purpose of this section, a fund would not have received dividends and trust distributions to which it is entitled, but which had not been paid to the fund. [11]
The time when a dividend or trust distribution amount is received by the SMSF depends on the payment option that is either chosen by the SMSF or prescribed by the company or trust respectively. [12]
If the method for payment is by way of direct credit to a nominated account with a financial institution, the dividend or trust distribution amount is received by the SMSF when the amount is credited to that account.
If the method for payment is by way of cash or cheque, the dividend or trust distribution amount is received by the SMSF when the cash or cheque is either collected or, if posted, actually received by the SMSF. It is not necessary for the cheque to be presented or cleared. [13]
Alternatively, the SMSF may have requested that the dividend or trust distribution amount be applied or dealt with in some way by the company or trust respectively on its behalf. For example, the SMSF may have opted to have its dividends or trust distributions reinvested through a dividend or distribution reinvestment plan. Although the EM explains that 'received' means paid, it is used in contradistinction to an entitlement to a dividend or trust distribution. In the Commissioner's view it is not meant to confine 'received' to only those circumstances where the dividend or trust distribution amount is actually paid to the SMSF.
It is therefore the Commissioner's view that if an SMSF has requested that a dividend or trust distribution amount be applied or dealt with in some way on its behalf, the SMSF is taken to have received that amount as soon as it has been applied or dealt with as requested. For example, if a dividend or trust distribution amount is to be reinvested in the company or trust respectively, the amount is received by the SMSF when the amount is appropriated for the purchase of additional shares or units, as appropriate. If a dividend or trust distribution amount is to be set-off against a liability owing by the SMSF to the company or trust respectively, the amount is received by the SMSF as soon as the set-off happens. [14]