Fabian has more than 20 years’ experience in the financial services industry. Since 2000, Fabian has been one of AMP’s technical experts, supporting financial advisers to keep up-to-date with changing regulations and requirements.
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This article examines the ability of SMSF trustees to transfer assets that they, or a related party, currently own into their SMSF, and some useful strategic solutions around this.
A common area of discussion for many SMSF trustees relates to their ability to transfer assets that they, or a related party, currently own into their SMSF.
Of course, superannuation legislation prohibits a trustee from intentionally acquiring an asset from a related party of the fund.
Importantly, this prohibition is not restricted to acquisitions that occur as a result of a purchase. Rather, the term ‘acquire’ generally includes any means by which the trustee becomes the legal and equitable owner of the asset. This includes, for example, assets that are transferred into an SMSF by way of an in specie contribution.
Notwithstanding this general prohibition, there are a number of exceptions which can often lead to some useful strategic solutions.
So, who is a related party?
The term ‘related party’ is defined as:
a member of a superannuation fund;
a standard employer-sponsor of a superannuation fund; or
a Part 8 associate of either a member or a standard employer-sponsor of a superannuation fund.
A standard employer-sponsor of an SMSF is an employer who contributes, or would contribute, to an SMSF for the benefit of a member, wholly or partly under an arrangement between the employer and the trustee of the SMSF.
However, it does not include an employer who contributes or would contribute to the SMSF only under an arrangement between the employer and a member, for example, where an employee has chosen for their contributions to be paid into an SMSF.
Part 8 associate
The definition of a Part 8 associate is used to determine which individuals (other than fund members) and which entities (other than a standard employer-sponsor) will be considered to be a related party of the fund.
The definition of a Part 8 associate considers:
Part 8 associates of individuals;
Part 8 associates of companies; and
Part 8 associates of partnerships.
While it is useful to be aware of these three separate definitions, as it is uncommon to encounter an SMSF with a standard employer-sponsor, we are typically only interested in identifying the Part 8 associate(s) of a member of the fund – and so our focus turns to the definition of Part 8 associates of an individual.
Broadly, a Part 8 associate of an individual includes:
a relative of the individual;
fellow fund members;
a partner in a partnership*, also including the spouse and children of that partner;
a trustee of a trust (in the capacity of trustee of that trust), where the individual controls the trust; and
a company that is sufficiently influenced by the individual or the individual holds the majority voting interest in the company.
* For this purpose, partnership not only includes the general law definition of partnership, but also includes persons in receipt of ordinary or statutory income jointly.
Exceptions to the acquisitions from a related party rule
There are several exceptions to the general rule prohibiting superannuation funds from intentionally acquiring assets from related parties of the fund.
Broadly, these exceptions include:
listed securities acquired at market value;
business real property;
a life insurance policy issued by a life insurance company, other than a policy acquired from a member or from the relative of a member;
an investment that is an in-house asset, where the asset is acquired at market value and the acquisition would not result in the level of in-house assets exceeding 5 per cent of the superannuation fund’s total assets; and
certain other assets specifically allowed to be acquired by the Regulations.
SMSFs can acquire listed securities from a related party if they are acquired at market value.
If a listed security is acquired by way of an in specie contribution, the contribution should be accurately recorded at the market value as at the date of transfer.
This ‘date of transfer’ typically occurs when the fund receives beneficial ownership of the listed securities. For example, a fund is considered to have acquired beneficial ownership of shares in an Australian Securities Exchange listed company when the fund obtains a properly executed off-market share transfer in registrable form.
Business real property
Business real property generally relates to an interest in real property (including freehold and leasehold interests), where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not).
Note: It is the use of the property (and not the zoning) that will be considered when determining if a property is being used wholly and exclusively in a business.
The two key elements of the business real property exception are that the:
1. property must be real property; and
2. property must be wholly and exclusively used in a business.
The expression ‘real property’ refers to land, which can generally be identified by reference to titles held over particular parcels of land. Any building or other fixture attached to the land generally also forms part of that real property.
Further, the property in question must be ‘wholly and exclusively’ used in a business. As such, where a property is only partially used in a business, it will generally not meet the ‘wholly and exclusively’ test.
For example, consider a scenario where a mechanical repairs business is being conducted from a garage that is located on the same property as the mechanic’s principal residence. Such an arrangement would not, at face value, meet the wholly and exclusively test and the property could not be acquired under the business real property exception.
Having said that, it is important to be aware of a unique exception to the wholly and exclusively test that applies to primary production businesses. Where a primary production business is being conducted on a property that also contains a residential dwelling, the wholly and exclusively requirement for determining whether the property is business real property or not will be met if:
1. the area that contains the dwelling, and is used primarily for domestic or private purposes, does not exceed two hectares; and
2. the domestic or private use is not the predominant use of the property.
Note: while the property must be used in a business, the ‘business’ does not necessarily have to be one that is conducted by a related party of the SMSF.
Another exception to the general prohibition applies to the acquisition of an investment that is an in-house asset, where the asset is acquired at market value and the acquisition would not result in the level of in-house assets exceeding 5 per cent of the superannuation fund’s total assets.
An in-house asset of a superannuation fund is broadly defined as:
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.
It is important to note that, for the purposes of this exception, ‘an investment that is an in-house asset of the fund’ only refers to those assets that are investments in a related party, or a related trust, of the SMSF. As such, this exception to the general acquisition prohibition does not apply to all forms of in-house assets.
For example, this in-house assets exception will not apply to an asset that is subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund – regardless of the value of that asset.
Further, notwithstanding the existence of this in-house asset exception, the 5 per cent in-house asset limit restricts the amount of in-house assets that a superannuation fund can acquire from a related party. And as such, it is often impractical, as essentially no more than 5 per cent of the market value of an SMSF’s assets can be used to acquire an in-house asset from a related party, such as shares in a private unlisted company, for example.
However, certain assets that are specifically exempted from being in-house assets can be acquired from a related party under this exception.
An example of this would be units in a 13.22C compliant unit trust. These trusts are those that meet a very specific and strict set of criteria (contained in Regulation 13.22C of the SIS Regulations) and as a result, are excluded from being treated as an in-house asset – despite typically being related trusts. In these circumstances, should an SMSF wish to acquire units in such a unit trust from a related party at market value, the 5 per cent limit would not apply.
Widely held unit trusts
Broadly, a unit trust is considered to be widely held if:
it is a unit trust in which entities have fixed entitlements to all of the income and capital of the trust; and
it is not a trust in which fewer than 20 entities between them have:
fixed entitlements to 75 per cent or more of the income of the trust; or
fixed entitlements to 75 per cent or more of the capital of the trust.
Managed funds offered to the public by fund managers have a very diverse unit holder register and will typically satisfy the definition of a widely held unit trust. Therefore, units in managed funds can typically be transferred into superannuation by related parties without breaching the prohibition on acquiring assets from a related party.
Life insurance policies
The general prohibition under the legislation also prevents a superannuation fund from acquiring a life insurance policy from a member or a relative of a member.
This prohibition covers risk-only policies (e.g. term life insurance, total and permanent disablement insurance, trauma insurance and income protection insurance) and policies that have an investment component (whole of life insurance and endowment insurance).
In this context, the meaning of ‘acquire’ also encompasses assignment of a life insurance policy, regardless of whether the policy is transferred on the annual renewal date or at any other point in time.
Notably, an exception to the prohibition on acquiring assets from a related party allows a fund to acquire a life insurance policy from a related party, as long as that related party is not a member of the fund or a relative of a member. As a result, under this exception, a superannuation fund can only practically acquire a life insurance policy from an employer-sponsor or other entity.
However, in order to have a policy that is currently owned by a member (or a relative) effectively transferred into an SMSF, it may be possible to cancel the policy and then have it re-issued with the fund as the owner. In many cases, if the policy is re-issued with the same insurer, for the same insured amount, re-underwriting the risk may not be necessary.
It is important to note that while most insurers will agree to transfer life insurance policies without the need for underwriting, they are not bound to do so. It is also important to make note of the policy definitions and premium costs to ensure they are not changed significantly to the client’s detriment.
And, from a practical point of view, individual’s considering the cancellation and re-issue of a life insurance policy, should ensure that the new policy is in force prior to cancelling their existing policy.
A fund trustee can acquire an asset in specie from another superannuation fund (i.e. where the other fund is a related party), following the relationship breakdown of a member of the fund, where the asset being acquired is for the benefit of a particular member of the acquiring fund and the asset represents the whole or part of that member’s entitlements.
To ensure that the intention of the general prohibition on acquisitions of assets is not circumvented, the legislation contains an anti-avoidance provision. This provision prevents a person from intentionally entering into or carrying out a scheme which has the effect of avoiding the general prohibition.
1. Which of the following would not be a related party of an SMSF?
a. A member of the SMSF. b. A company that is fully controlled by the members of the SMSF. c. An employer that contributes to the SMSF pursuant to an arrangement between the employer and the trustee of the SMSF. d. An employer that contributes to the SMSF pursuant to an arrangement between the employer and a member of the SMSF.
2. Which of the following assets would not meet the definition of business real property?
a. A factory that is used wholly and exclusively to produce automotive parts. b. Premises that are solely used as a dental surgery. c. Land that is primarily used to grow fruit, but 1.5 hectares of the land includes the farmer’s principal residence. d. An accountant’s principal residence, where one room of the residence is used as his second office from which to conduct his accountancy business.
3. Mark and his wife, Saayuri, are both members and trustees of their SMSF. They have a number of life insurance policies they would like to transfer into their SMSF. Which of the following life insurance policies can they transfer into their SMSF without having to be cancelled and reissued?
a. A life insurance policy on Mark’s life, which is owned by Saayuri. b. A life insurance policy on Mark’s life, which is owned by a company that Mark and Saayuri fully control. c. A life insurance policy on Saayuri’s life, which is owned by Saayuri. d. All of the above.
4. Which of the following assets, when owned by a related party of an SMSF, could not be acquired by the SMSF?
a. Shares listed on a stock exchange. b. Units in a public offer managed fund that meet the definition of a widely held unit trust. c. A residential investment property that is rented to a tenant for a market rate of rent. d. None of the above.
5. It is the use of the property (and not the zoning) that will be considered when determining if a property is being used wholly and exclusively ina business.