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Acquiring Assets from a Related Party – What is OK?

 

 

 

 

 

 

 

 

 

The trustees of a self managed superannuation fund (SMSF) are prohibited from intentionally acquiring an asset from a related party of the fund, except for assets permitted under s.66(1) of the SIS Act.

It is important to note that this prohibition is not restricted to a physical purchase of an asset. The term acquire includes any means by which the fund becomes the legal and equitable owner of the asset and hence includes transfers in via specie contributions.

The definition of a “related party” is not restricted by bloodline or to individuals; it is in fact, much more far-reaching than that. Section 10 of the SIS Act specifies a related party to be any of the following:  

  • A member of the fund
  • A standard employer-sponsor of the fund
  • A Part 8 associate of an entity referred to in either of the above

For further information regarding who is considered a related party click here.

Under s.66(1) of the SIS Act, a fund may acquire the following assets from a related party:

Listed Security

A listed security can be acquired from a related party and is defined under s.66(5) of the SIS Act.

Security listed for quotation in the official list of any of the following:

  • A licensed market within the meaning of section 761A of the Corporations Act 2001
  • An approved stock exchange within the meaning of the Income Tax Assessment Act 1997
  • A market exempted under section 791C of the Corporations Act 2001

Essentially, any security listed on any recognised stock exchange anywhere in world will meet this definition.

Business Real Property

Property that is considered ‘Business Real Property’ can be acquired from a related party. 

Business real property must:

  • Be real property
    • any freehold or leasehold interest
    • any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer
    • A demountable placed on land would not qualify as it is not real property in its own right.
      • If a structure is not a permanent part of the land, it is not real property in the true sense.
    • Does not include items such as plant, machinery, motor vehicles, etc
  • Must satisfy the “business use test”
    • Wholly and exclusively used in one or more businesses to the exclusion of other types of use.
      The term “wholly and exclusively” means:

      • Used to an appreciable degree
      • Minor part of property may not be used at all
  • There are a few exceptions where a residential portion of the property is required for the business to sufficiently run, therefore, the property will still be considered business real property.
    Examples:

    • Motels, Boarding houses & B&B
    • Farms With up to 2 hectares of residential land
  • Vacant Land
    • Vacant land held for development purposes may be regarded as business real property where used as part of a land development business
    • Vacant land which is used in a business would qualify as business real property (e.g. primary production land, car park)
    • Temporarily vacant land on which commercial premises are constructed will remain business real property, even where the premises are currently unleased, provided the property is simply ‘between leases’ and the owner has not abandoned their plans to lease the property [SMSFR 2009/1 para 227 to 228]. Similarly the business use of the property must not be simply ‘transitory or temporary’.

Tenants in Common

It is important to note that if the SMSF is acquiring an interest in a property owned as tenants in common with a related party, then the property acquired must be business real property. If the property owned as tenants in common with an unrelated party is acquired by the SMSF, the property can be either residential or commercial property.

In-House Assets

Trustees can acquire in-house assets from a member or related party of the fund providing:

  • The asset is acquired at market value
  • The acquisition of the in-house asset does not cause the fund to breach the permitted 5% in-house asset threshold (i.e. total in-house asset of the fund cannot exceed 5% of the value of the fund’s assets immediately after the acquisition)

* Note that from 11 August 1999 an in-house asset refers to (s.71(1) SISA):

  • A loan to a related party of the fund. For practical reasons loans are rarely acquired by related parties
  • An investment in a related party of the fund, such as shares in a private company
  • An investment in a related trust, or

All the above in-house assets can be acquired by an SMSF.

Assets that cannot be acquired include:

  • An asset of the fund which is subject to a lease or lease arrangement between the trustees and a related party. This was announced in SMSFR 2010/1 and was a result of an early release scheme that had come to the attention of the regulator.

Exempt In-House Assets

Certain assets that are specifically exempted from being in-house assets can be acquired from a member or related party of the fund, providing the acquisition is made at market value. This includes:

  • 22C / Ungeared Unit Trusts
    • Under s71(1)(j) of the SIS Act, an investment by an SMSF in a related unit trust will be exempt from the in-house asset rules where the trust satisfies the requirements listed in r.13.22C of SISR
    • For more information on 13.22C trusts click here
  • Widely Held Trusts
    • Under s71(1)(h) of the SIS Act, an investment made by an SMSF in a widely held trust will be exempt from the in-house asset rules
    • A widely held unit trust is one in which at least 20 unrelated entities between them have fixed entitlement to 75% or more of the income and capital of the trust

NOTE – Where a trust/company is considered unrelated, to which it doesn’t meet the requirements of r.13.22C in addition to not being considered ‘widely held’, a SMSF is prohibited from acquiring ANY units/shares from a related party. The 5% in-house asset threshold does not apply.

Life Insurance Policies

Life insurance policies acquired at market value can also be acquired from a related party, providing it is not acquired from:

  • A member of the fund
  • A relative of a member of the fund

For example, a life insurance policy owned by the member’s family trust could be transferred to the SMSF without breaching the acquisition rules, however, this could not be done if the policy was owned by a member of the fund.

Where a member or relative of a member owns a life insurance policy to which it is desired for the fund to hold that policy, one strategy could be to cancel the policy and establish a new policy to be re-issued in the name of the SMSF. With this option the insurer may require a new underwriting process to take place, which may be something the member wants to avoid.

Breakdown of Relationship

In the event of a relationship breakdown, the trustees can acquire any asset from another SMSF without breaching s66 (i.e. a related party SMSF) where the assets being acquired represent the transferring member’s interest in the transferring fund, or their entitlement under a payment split.

Last Asset Standing

Under s.66(2C) a fund can undertake an acquisition of an investment from a related party if its acquired under a merger between regulated superfunds. Therefore there may be scope to transfer a non-permitted investment to another fund that is winding up via a rollover.

In summary SMSF’s are allowed to invest in, and transact with related parties subject to the rules that surround such transactions. The following SISA provisions also apply to investment transactions with related parties. Those provisions in the SISA are:

  • Sole Purpose Test: The investment must not conflict with the sole purpose of providing retirement-related benefits to the member and/or dependants of the SMSF;
  • Arm’s Length Transaction: The acquisition cost of the asset acquired by the SMSF must be at market value and the transaction must be conducted at arm’s length;
  • Investment Strategy & Fund Deed’s governing rules: The asset acquired by the SMSF must be allowable by the funds’ deed and in accordance with the investment strategy formulated for the SMSF;
  • Borrowings: If the SMSF needs to borrow money to acquire the asset, then the borrowing must be structured correctly and in accordance with the limited recourse borrowing provisions.

Anti-Avoidance

S.66(3) of the SIS Act contains provisions prohibiting the use of schemes designed to avoid the application of the acquisition of asset rules set out s.66(1) of the SIS Act by using one or more interposed entities.

ATO Guidance

SMSFR 2010/1 provides further ATO insight regarding acquisition of assets from a related party with reference to s.66(1) of the SIS Act.

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