QUESTIONS AFTER YOU SET UP YOUR SUPER FUND
Can a member or his associate sell, at market value, assets into his Self Managed Super Fund? My understanding is that, apart from listed shares on certain exchanges and business real estate that you own, you can’t sell anything from yourself and associates into your SMSF – whether at market value or not.
Subject to certain expectations, section 66(1) prohibits the trustee of a regulated superannuation fund (such as a Self Managed Super fund) from acquiring an asset from a related party of the fund. The prohibition would normally prevent members (and other related parties) from selling most assets to their superannuation fund (ie. making in specie contributions to the fund).
Who is a “related party”?
A “related party” means a member or a standard employer-sponsor of the fund and their Part 8 associates. The term “Part 8 associate” is widely defined. Section 70B to 70E sets out which individuals and entities are associates of a member or a standard employer-sponsor and explains concepts relating to control and influence of entities which may bring in both the controlled and controlling entities as associates. For example, associate of member (and employer-sponsor) include their relatives, business partners and any companies or trusts that they control (either alone or with their other associates), or companies and trusts which control the employer.
Anti-avoidance provisions also prevent a superannuation fund from setting up or undertaking a scheme which would result in the fund acquiring assets through interposed entities having a connection with a related party (section 66(3)).
A person who contravenes section 66(1) or (3) is guilty of an offence punishable on conviction by a term of imprisonment not exceeding one year (section 66(4)).
The prohibition covers the intentional acquisition of an asset. Therefore, a breach arises if the trustee knowingly acquires the asset from a related party, whereas an inadvertent acquisition will usually not offend section 66 unless an avoidance scheme is involved. this qualification provides some relief, particularly to trustees of large funds who may unlikely that this would be the case with SMSFs.
The terms “acquire” and “asset” are not defined for the purposes of section 66. Generally, “acquire” is taken to mean the trustee becoming the legal or equitable owner through the purchase or transfer of an asset, and “asset” includes real property and personal property, which may be tangible (eg a boat, works of art) or intangible (eg copyright ownership). All forms of in specie contributions to a superannuation fund would therefore be covered. To “acquire an asset”, however does not include accepting money.
Permitted acquisitions from a related part
The prohibition on acquisition of assets from a related party does not apply if:
the asset is a “listed security” (defined in section 66(5)) acquired at market value;
- for a fund with fewer than five members (i.e. a SMSF or small APRA fund) – the asset is “business real property” (defined in section 66(5)) acquired at market value;
- the asset is acquired under merger between regulated superannuation funds;
- the Regulator has determined in writing that the asset is of a kind that may be acquired by the fund, or a class of funds of which the fund is included; or
- the asset is an in-house asset acquired at market value and the acquisition does not result in the fund breaching the in-house asset rules (section 66(2), (2A)).
Further guidelines and discussion on the application of sec 66 may be found in the Superannuation Circular No II.D.3 and from tax and superannuation law firms such as Brett Davies Lawyers.
Can an asset be purchased from your Self Managed Fund by you or a related party at market value?
Sale of fund asset to related party
There is no provision in the SIS legislation that directly governs the sale of a superannuation fund’s assets to a related party however, the fund trustee must ensure that the arm’s length and related rules in the SISA, as below, are observed.
Arm’s length rule
SISA section 109 provides that all investment transactions of a regulated superannuation fund are made and maintained on an arm’s length basis. The arm’s length rule does not prevent trustees (or investment managers) from entering into investment transactions with related or associated parties as the rule applies to the terms of the transaction, not the identity or relationship of the parties.
Therefore, a superannuation fund’s investment transactions need not necessarily be at arm’s length (i.e. they may be between related or associated parties) by the transactions must be on an arm’s length (commercial) basis. Briefly, this means that the investments must be entered into and maintained on commercial terms, or on terms that are no more favourable to the other party than would reasonably be excepted if the dealing were at arm’s length in the same circumstances.
For instance the sale/purchase price of an investment should be at market value (or value more favourable to the fund than to the other party). in addition, the agreed or expected return from that investment should be at not less than a true market rate. In addition, the trustee must enforce its ongoing rights against a related party in the same manner as it would against any other party.
Whether a transaction is undertaken on an arm’s length basis is judged accordingly to all the circumstances of a particular investment. The test is whether a prudent person acting with due regard to his own commercial interests would have made such an investment decision. For instance, the trustee should consider whether:
- the asking price is a fair price given the expected return on the asset, the risks to which the asset is exposed, and the relative liquidity of the asset;
- the projected returns of income and / or capital are in line with market expectations;
- the contract or agreement adequately protects the interest of the superannuation fund, with clear legal identification of all parties and their rights and obligation; and
- professional valuations have been obtained, where appropriate.
While none of these considerations alone would necessarily determine an investment as being on an arm’s length basis, each could constitute a degree of evidence in support of that inference.
In addition to the above, the trustee must also note that in all dealings of the superannuation fund, it must have regard to the general trust law, the trust deed and the codified covenants imposed under SISA sections 52. For instance, among other things, the covenants require the trustee to “act honestly in all matters”, to exercise due care, skill and diligence, and to act in the “best interests of the beneficiaries” when discharging the trustee’s duties and powers.
Finally the trustee should also consider whether the divesting of fund assets is in accordance with or forms part of the properly formulated and implemented investment strategy of the fund under SISA section 52(2)(f).
It is almost impossible to purchase an asset out of your SMSF. If you can’t wait until you retire then gather around your professional advisors and systematically work through the process.