House of Representatives

Superannuation Legislation Amendment Bill (No. 4) 1999

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Rod Kemp)

Schedule 1 - Amendments of the Superannuation Industry (Supervision) Act 1993

Explanation of Provisions

Section 10: Definitions

Section 10 of the SIS Act defines the terms used in the Act.

Items 1 - 6

These items insert definitions into subsection 10(1).

Item 1 inserts the definition of entity into subsection 10(1). Entity means any of the following:

(a)
an individual;
(b)
a body corporate;
(c)
a partnership;
(d)
a trust.

Item 2 inserts the definition of lease arrangement into subsection 10(1). Lease arrangement means any agreement, arrangement or understanding in the nature of a lease (other than a lease) between the trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings. This definition does not alter the arms length requirements under section 109 of the SIS Act.

This definition covers arrangements in the nature of a lease, and is not intended to include custodial arrangements for the holding of assets, or arrangements where the only purpose is to repair assets.

Item 3 inserts the definition of loan into subsection 10(1). Loan includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings. This definition does not alter the arms length requirements under section 109 of the SIS Act.

The definition of a loan is not intended to cover a situation where a superannuation fund pays its own administrative expenses and is subsequently reimbursed by an employer-sponsor.

Item 4 links the definition of Part 8 associate in section 10(1) of the SIS Act with Subdivision B of Division 1 of Part 8 (see item 25 ), which contains a detailed definition of Part 8 associate.

Item 5 inserts the definition of related party into subsection 10(1). A related party of a superannuation fund means any of the following:

·
a member of the fund;
·
a Part 8 associate of a member of the fund;
·
a standard employer-sponsor of the fund;
·
a Part 8 associate of a standard employer-sponsor of the fund.

Item 6 inserts the definition of related trust into subsection 10(1). A related trust of a superannuation fund means any trust that a member or a standard employer-sponsor of the fund controls (within the meaning of section 70E). This definition is used in item 26 , to ensure that an investment in a trust controlled by a related party of a superannuation fund is covered by the in-house asset rules.

Section 65: Loans to members and relatives

Section 65 of the SIS Act prohibits a trustee or investment manager of a superannuation fund from lending money or providing financial assistance to a member or a relative of a member of the fund.

Item 7

This item sets out the definition of relative to be used in section 65 in the same terms as the definition used for the purposes of new sections 70B, 70C and 70D (see item 25 : new subsection 70E). This is the definition used in the ITAA 36.

Item 8

The Bill amends the in-house asset rules in Part 8 (see item 26 ), extending their application to all related parties of a fund. Loans to related parties will be included as in-house assets of a fund. Item 8 ensures that, although members and relatives of members of a fund are related parties under Part 8, the lending of money or providing financial assistance to a member or a relative of a member of a fund remains prohibited under section 65.

Section 66: Acquisition of assets from related parties

Section 66 of the SIS Act currently prohibits a trustee or investment manager of a superannuation fund from intentionally acquiring an asset from a fund member or a relative of a fund member.

Items 9 and 10

Item 9 extends the section 66 prohibition to include assets acquired from any related party of the fund, by replacing references to members and relatives of members in paragraphs 66(1)(a) and (b), with from a related party of the fund.

Subsection 66(2) provides an exception to this prohibition. The existing exception allows trustees or investment managers of a superannuation fund to acquire certain assets at market value from fund members or relatives of fund members. These assets include listed securities, and for funds with fewer than 5 members, business real property that represents no more than 40 per cent of the total value of the assets of the fund. Item 10 amends subsection 66(2) so that the exemptions will apply to the acquisition of an asset from any related party of a fund, by replacing the reference to member of the fund or a relative of such a member with related party of the fund.

Item 11

This item amends the existing subsection 66(2) exemptions from the section 66 prohibition, and introduces a number of new exemptions. To achieve this, item 11 repeals paragraphs 66(2)(a), (b) and (c), and substitutes new paragraphs 66(2)(a), (b), (c), and (d).

New paragraph 66(2)(a), like the previous provision, exempts assets that are listed securities acquired at market value. The definition for listed securities is being expanded to include securities listed on approved overseas stock exchanges, and domestic exempt stock markets (see item 19 ).

One of the existing exemptions contained in subsection 66(2) is for business real property of members and relatives. New paragraph 66(2)(b) provides an exemption from the section 66 prohibition for a superannuation fund with fewer than five members that acquires an asset that is business real property at market value. There is no longer a fixed maximum percentage of fund assets that can be used for this purpose. Item 11 effectively increases the percentage of fund assets that can be used by a superannuation fund with fewer than five members to acquire business real property from 40 per cent to 100 per cent.

New paragraph 66(2)(c) exempts assets that are acquired under a merger between regulated superannuation funds.

New paragraph 66(2)(d) allows the Regulator (either APRA or the ATO) to make a written determination that an asset of a kind may be acquired by any fund, or a class of funds in which the fund is included. Such a determination is a disallowable instrument (see item 12 ).

Unlike the other amendments to section 66, item 11 and (related) item 14 apply from 7:30 p.m. Australian Capital Territory legal time, 12 May 1998 (see item 45 ).

Item 12

This item inserts subsection 66(2A) into the SIS Act to address the interaction between section 66 and Part 8, and inserts subsection 66(2B) which makes a determination under paragraph 66(2)(d) a disallowable instrument.

Subsection 66(2A) provides an exemption from the prohibition of acquisition of assets by a trustee or investment manager of a superannuation fund, from a related party of the fund. The exception only applies to an acquisition that:

(a)
constitutes an investment that:

(i)
is an in-house asset within the meaning of subsection 71(1); or
(ii)
would be an in-house asset of the fund within the meaning of subsection 71(1) apart from the operation of Subdivision D of Part 8 (that is, assets covered by the transitional arrangements for the in-house asset rule changes); or
(iii)
is a life insurance policy issued by a life insurance company (other than a policy acquired from a member or a relative of a member); or
(iv)
is referred to in any of paragraphs 71(1)(b) to (f) or paragraph 71(1)(h), that is, falls within any of the types of assets listed in those paragraphs; and

(b)
is at market value; and
(c)
does not result in the level of in-house assets of the fund exceeding the level permitted by Part 8.

Item 13

Subsection 66(3) of the SIS Act currently prohibits the use or commencement of a scheme that would result in a trustee or investment manager of a fund acquiring an asset from a person connected directly or indirectly to a fund member or relative of a fund member. Item 13 extends the scope of this prohibition to include the use of a scheme that would result in the acquisition of an asset from a person connected to a related party of the fund.

Item 14

This item repeals the definition of acceptable percentage contained in subsection 66(5) of the SIS Act. The definition specifies the percentage of business real property a superannuation fund with fewer than five members can acquire from a related party. This definition is now redundant, as new subparagraph 66(2)(b) (see item 11 ) allows a superannuation fund with fewer than five members to acquire business real property from a related party with up to 100 per cent of fund assets, without reference to an acceptable percentage.

Item 15

This item repeals the existing definition of business real property, and replaces it with a new definition. The (new) definition of business real property, in relation to an entity, means:

(a)
any freehold or leasehold interest of the entity in real property; or
(b)
any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
(c)
if another class of interest in real property is prescribed by the regulations for the purposes of this paragraph - any interest belonging to that class that is held by the entity;

being real property which is used wholly and exclusively in one or more businesses (whether carried on by the entity or not). This does not include an interest held in the capacity of beneficiary of a trust estate.

The new definition of business real property differs from the old in that it refers to an entity, rather than a person. It requires that the real property be used in one or more businesses, that are not necessarily carried on by the entity. The new provisions also specifically cover interests in Crown land, such as holdings of rural land, that do not constitute a leasehold, and provide for further classes of interest in real property to be included via insertion into the regulations.

This definition is not intended to exclude real property used in a business that has ceased operating for a period of time, providing the asset is not used for non-business purposes.

Items 16 - 18

These items repeal a number of definitions contained in section 66(5) that will no longer be used in this section. The repealed definitions are those of close associate ( item 16 ), direct control interest ( item 17 ), and exempt business real property ( item 18 ).

Item 19

This item expands the definition of listed security, by including securities listed on:

·
approved stock exchanges for the purposes of section 470 of the ITAA 36 (these include approved foreign stock exchanges); and
·
exempt stock markets as detailed in section 771 of the Corporations Law.

Item 20

This item inserts the definition of primary production business into subsection 66(5). The definition has the same meaning as in the ITAA 97.

Item 21

This item repeals the definition of relative contained in subsection 66(5). This definition will no longer be used in this section.

Item 22

This item repeals subsections 66(6), (7) and (8), and inserts a new subsection 66(6), which clarifies the application of the business real property exemption in regard to real property used in one or more primary production businesses.

The existing subsections 66(6), (7) and (8) will no longer be used in this section. These relate to a business carried on by a body corporate, the definition of close associate and the definition of direct control interest.

New subsection 66(6) states that real property used in one or more primary production businesses does not cease to be business real property only because an area of the real property not exceeding 2 hectares contains a dwelling, and both the dwelling and the area are used primarily for domestic or private purposes. However, the domestic or private purpose must not be the predominant use of the real property as a whole.

Part 8: In-house Asset Rules

Item 23

Part 8 of the SIS Act deals with the application of in-house asset rules to regulated superannuation funds. Item 23 inserts a subdivision heading to Part 8 of the SIS Act. Items 25 and 34 also each insert two subdivision headings into Part 8.

Item 23 inserts after the heading to Division 1 of Part 8: Subdivision A - General

The subdivision heading Subdivision B - Part 8 associates is inserted after section 70A by item 25 .

The subdivision heading Subdivision C - In-house assets is inserted after section 70E by item 25 .

The subdivision heading Subdivision D - Transitional arrangements in relation to in-house assets is inserted after section 71 by item 34 .

The subdivision heading Subdivision E - Other provisions in relation to in-house assets is inserted after section 71F by item 34 .

The other amendments made by items 25 and 34 are described later.

Item 24

This item repeals section 70. The definition of a Part 8 associate replaces the definition previously existing in section 70 (see item 25 ), and is used to determine the Part 8 associates of employer-sponsors.

Definition of a Part 8 Associate

Item 25

Item 25 inserts the definition of a Part 8 associate into the SIS Act. The definition of Part 8 associate is used to determine which entities are associates of a standard employer-sponsor or a member of a fund. Part 8 associates of a standard employer-sponsor or a member of a fund are related parties of a fund for the purpose of section 66 and Part 8 of the SIS Act.

The definition of a Part 8 associate is covered by sections 70BAA - 70E. Before these amendments, section 26AAB(14) of the ITAA 36 was relied on for a definition of associate.

Part 8 associates are defined in terms of the primary entity. For the purpose of section 71(1) (see item 26 ), and section 66, the primary entity can be a standard employer-sponsor or a member of the fund.

In broad terms, Part 8 associates are those entities that are relatives of an individual, partners, entities that are controlled or majority owned, or entities that control the primary entity. The separate definition of a related trust (see item 6 ) is used to cover an investment in a controlled trust.

The definition of Part 8 associate includes definitions for primary entities that are individuals, companies and partnerships. A trustee that is an employer-sponsor is treated as either an individual or a company.

Various expressions used are also defined by the item, including those of sufficient influence, majority voting interest, control of trust, and group in relation to an entity. Definitions of partnership and relative are also given.

Part 8 associates of individuals (section 70B)

For the purposes of this Part, each of the following is a Part 8 associate of an individual (the primary entity), whether or not the primary entity is in the capacity of trustee:

(a)
a relative of the individual (see subsection 70E(4));
(b)
if the individual is a member of a superannuation fund with fewer than 5 members:

(i)
each other member of the fund;
(ii)
if the fund is a single member self managed superannuation fund whose trustee is a company - each director of that company; and
(iii)
if the fund is a single member self managed superannuation fund whose trustees are individuals - those individuals;

(c)
a partner of the individual, or a partnership in which the individual is a partner (see subsection 70E(4));
(d)
the spouse and children of partners of the individual;
(e)
a trustee of a trust (in the capacity of trustee of that trust), where the individual controls the trust (see subsection 70E(2));
(f)
a company that is sufficiently influenced by, or in which a majority voting interest is held by the individual and/or the individuals Part 8 associate(s) (see subsection 70E(1)).

Part 8 associate diagram 1: primary entity is an individual

The diagram below summarises the Part 8 associates of an individual (employer-sponsor or member):

Diagram to summarise the Part 8 associates of an individual primary entity (employer-sponsor or member)

Part 8 associates of companies (section 70C)

For the purposes of this Part, each of the following is a Part 8 associate of a company (the primary entity), whether or not the primary entity is in the capacity of trustee:

(a)
a partner of the company, or a partnership in which the company is a partner;
(b)
the spouse and children of partners of the company;
(c)
a trustee of a trust (in the capacity of trustee of that trust), where the company controls the trust (see subsection 70E(2));
(d)
another entity (the controlling entity) which sufficiently influences the company, or holds a majority voting interest in the company (see subsection 70E(1)). For the purposes of this paragraph, sufficient influence or majority voting interest is held by the controlling entity and/or its Part 8 associate(s).
(e)
another company (the controlled company) which the primary entity sufficiently influences, or in which the primary entity holds a majority voting interest (see subsection 70E(1)). For the purposes of this paragraph, sufficient influence or majority voting interest can be held by the primary entity and/or its Part 8 associate(s).
(f)
a Part 8 associate of a controlling entity, as defined by paragraph 70C(d).

Part 8 associate diagram 2: primary entity is a company

The diagram below summarises the Part 8 associates of a company (employer-sponsor):

Diagram to summarise the Part 8 associates of a company as primary entity (employer-sponsor)

Part 8 associates of a partnership (section 70D)

For the purposes of this Part, each of the following is a Part 8 associate of a partnership (the employer-sponsor):

(a)
a partner in the partnership;
(b)
a Part 8 associate of a partner who is an individual; and
(c)
a Part 8 associate of a partner that is a company.

Part 8 associate diagram 3: primary entity is a partnership

The diagram below details the Part 8 associates of a partnership (employer-sponsor):

Diagram to summarise the Part 8 associates of a partnership as primary entity (employer-sponsor)

Sufficient influence/majority voting interest in a company (subsection 70E(1))

Subsection 70E(1) defines the expressions sufficiently influenced and majority voting interest for a company, for the purposes of sections 70B, 70C and 70D.

A company is sufficiently influenced by an entity or entities if the company, or a majority of its directors, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).

An entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

Control of trust (subsection 70E(2))

Subsection 70E(2) specifies the circumstances in which an entity controls a trust for the purposes of the definition of a related trust (see item 6 ) and sections 70B, 70C and 70D. These include when:

(a)
a group in relation to the entity has a fixed entitlement to more than 50% of the capital or income of the trust; or
(b)
the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); or
(c)
a group in relation to the entity is able to remove or appoint the trustee, or a majority of trustees, of the trust.

Group in relation to an entity (subsection 70E(3))

Subsection 70E(3) defines the expression group in relation to an entity, referred to in subsection 70E(2). This includes:

(a)
the entity acting alone; or
(b)
a Part 8 associate of the entity acting alone; or
(c)
the entity and one or more Part 8 associates of the entity acting together; or
(d)
2 or more Part 8 associates of the entity acting together.

Definitions (subsection 70E(4))

Subsection 70E(4) defines the terms company, partnership and relative for the purposes of sections 70B, 70C and 70D. Partnership and company have the same meaning as in the ITAA 97. Relative, in relation to an individual, means the following:

(a)
a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that individual or of his or her spouse; and
(b)
the spouse of that individual or any other individual specified in paragraph (a).

Definition of in-house asset

Part 8 of the SIS Act sets limits on the value of in-house assets a regulated superannuation fund can acquire and hold. Prior to the amendments in this Bill, an in-house asset was defined by Subsection 71(1) as an asset of a superannuation fund (with certain exceptions) that is a loan to, or an investment in, a standard employer-sponsor of that fund, or an associate of a standard employer-sponsor of that fund.

Item 26

This Bill extends the application of the in-house asset rules to any related party of a superannuation fund and to cover investments in a related trust and the leasing of assets to any related party. To achieve this, item 26 replaces the reference to a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund in subsection 71(1), with the broader category of a related party of the fund.

The definition is also extended to cover an investment in a related trust of the fund and an asset of the fund subject to a lease or a lease arrangement between the trustee of a fund and a related party of the fund.

Where a superannuation fund trustee enters into a lease or lease arrangement with respect to part of a property, the in-house asset is the part of the property that is leased to the related party. For example, if a superannuation fund owned a block of flats and leased one flat to a related party, then the flat leased to the related party would constitute an in-house asset, not the entire block of flats.

Where an asset is leased or subject to a lease arrangement for part of the year, then the full value is an in-house asset for the period that it is leased or subject to a lease arrangement with a related party. For example, if a superannuation fund owned a beach house, and leased the beach house to a member for two months of the year, the full market value of the beach house would be included in the in-house asset ratio of the fund during that two month period.

Exceptions to definition of in-house asset

Item 27

Included in the definition of an in-house asset in section 71 is a list of asset categories that are not in-house assets of a superannuation fund. This item adds three categories to the list of assets that are not in-house assets.

Paragraph 71(1)(g) exempts business real property that is subject to a lease or lease agreement between the trustee of a superannuation fund with fewer than 5 members and a related party of that fund from inclusion as an in-house asset of the fund. The asset leased must be business real property of the superannuation fund, that is, the property must be used in one or more businesses (including, for instance, if a related party sub-lets part of the property to another person conducting a business). The lease or lease agreement must be enforceable through legal proceedings.

Paragraph 71(1)(h) exempts investment by a superannuation fund in a widely held unit trust from inclusion as an in-house asset of a fund. A widely held unit trust is defined in new subsection 71(1A).

Paragraph 71(1)(i) exempts property owned by a superannuation fund and a related party as tenants in common from inclusion as an in-house asset of a superannuation fund. However, property that is subject to a lease or lease arrangement between the trustee of a superannuation fund and a related party is not covered by this exemption (although it may be covered by the separate exemption for business real property).

Item 28

This item adds subsection 71(1A) to the SIS Act, which defines a widely held unit trust for the purposes of the Act.

A widely held unit trust is defined as a trust that:

(a)
is a unit trust in which entities have fixed entitlements to all of the income and capital of the trust; and
(b)
is not a trust in which fewer than 20 entities between them have:

(i)
fixed entitlements to 75% or more of the income of the trust; or
(ii)
fixed entitlements to 75% or more of the capital of the trust.

For this purpose, an entity and the Part 8 associates of the entity are taken to be a single entity.

Items 29 and 30

Prior to the amendments in this Bill, subsection 71(2) of the SIS Act covered agreements where any person that entered into or carried out the agreement did so for the purpose of achieving the equivalent of an in-house investment. Where this provision applies, an asset that would not otherwise be an in-house asset is taken to be an in-house asset.

Item 29 amends subsection 71(2) so that for the provision to apply, it will be sufficient that any of the persons who entered into or carried out an agreement was aware that the result would be that:

(i)
a loan would be made to, an investment would be made in, or an asset would be subject to a lease or lease arrangement with, a related party of the fund; or
(ii)
an investment would be made in a related trust of the fund.

The item also inserts subsections 71(2A) and 71(2B). Subsection 71(2A) states that for the purposes of subsection 71(2), agreement includes any arrangement, understanding, promise of undertaking whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

Subsection 71(2B) exempts certain categories of assets from the application of subsection 71(2). The categories exempted are those covered by paragraphs 71(1)(a), (b), (ba), (c) and (h), that is, respectively:

·
a life policy issued by a life insurance company;
·
a deposit with an authorised deposit-taking institution;
·
a deposit with an approved non-ADI financial institution;
·
an investment in a pooled superannuation trust (where the trustee of the fund and the trustee of the pooled superannuation trust acted at arm's length in relation to the making of that investment); and
·
an investment in a widely held unit trust.

Item 30 amends subsection 71(3), to ensure that subsection 71(2) does not stop the same asset from being treated as if it were a loan to, an investment in, or an asset subject to a lease or lease arrangement with, 2 or more persons. This means where subsection 71(2) applies to an asset of a fund, the asset can be treated as two or more assets for the purpose of the in-house asset ratio.

The following example illustrates the application of subsection 71(3).

Example As a result of an agreement, superannuation fund A invests $100,000 in company B, which is not a related party. As a result of an agreement between the trustee of superannuation fund A and the directors of company B, company B makes a loan of $60,000 to trust C and $40,000 to company D. Trust C and company D are both employer-sponsors of the fund.Subsection 71(2) applies to the investment by fund A in company B. In this case, there would be two in-house assets, one of $60,000 with respect to trust C and one of $40,000 with respect to company D. This split would be taken into account determining the market value ratio of in-house assets under section 75.

Determination under subsection 71(4) by the Regulator

Items 31 - 33

Subsection 71(4) provides the power to determine that an asset of a superannuation fund is an in-house asset.

Item 31 includes assets that are subject to a lease or lease arrangement in the scope of assets that can be determined to be in-house assets.

Item 32 amends the definition of in-house asset used in the subsection, to make it consistent with subsection 71(1). To achieve this, item 32 includes leases and lease arrangements in the scope of assets that can be determined to be in-house assets, and replaces the reference to standard employer-sponsor with related party or related trust of the fund.

Item 33 replaces reference to the employer-sponsor with a related party or related trust. It also covers leases and lease arrangements. A determination has the effect that an asset is taken to be an in-house asset, despite the exceptions contained in subsection 71(1) that state that assets of certain categories are not in-house assets.

Public sector superannuation funds

Item 34

This item inserts both a new subsection concerning public sector superannuation funds, and a number of new sections that detail transitional arrangements in relation to in-house assets.

New subsection 71(7) describes how this section is to apply to a public sector superannuation fund, in regard to a Part 8 associate of an employer-sponsor. This replaces paragraph 70(b), which defines associates of standard employer-sponsors of public sector funds and which is repealed by item 24 .

An entity is only a Part 8 associate of an employer-sponsor of a public sector fund if it is a body corporate in respect of which either of the following conditions is satisfied:

(a)
the body corporate is sufficiently influenced by, or a majority voting interest in the body corporate is held by, the employer-sponsor;
(b)
the employer-sponsor is sufficiently influenced by, or a majority voting interest in the employer-sponsor is held by, the body corporate.

Transitional Arrangements

The changes to the definition of in-house asset apply to the making of a loan or an investment after the test time (7:30 p.m. 12 May 1998) and to an asset subject to a lease or lease arrangement after that time (see item 45 ). This is subject to additional transitional rules as set out below.

Exceptions - pre-12 May 1998 investments and loans (Section 71A)

Section 71A provides an exemption from the new in-house asset provisions for assets that relate to specified transactions undertaken prior to the test time. The section exempts an asset from being an in-house asset of a superannuation fund at any time after 7.30 p.m. 12 May 1998, if the asset consists of:

(i)
a loan or an investment made before the test time, or made after the test time under a contract entered into before the test time; or
(ii)
a share or unit in a unit trust, if the share or the unit was acquired before the test time or under a contract entered into before the test time (this exemption applies regardless of any payments on the share or unit made to the issuer of the share or unit before 1 July 2009).

These exemptions apply if the asset would not have been an in-house asset before the provisions in this Bill came into effect.

If section 71A applies to partly paid shares and units, payments made on these shares and units by 30 June 2009 will not make the assets in-house assets.

Subsections 71A(2) and (3) set out the effect of payments made after 30 June 2009. In these circumstances, a proportion of the share or unit will be an in-house asset, reflecting the proportion of the aggregate payments on the share or unit that are made after 30 June 2009. This proportion is given by the formula:

Market value of share or unit * (Excess amount / Total amount)

Example Superannuation fund S acquires partly paid units in trust T before 12 May 1998, making a payment of 50 cents on each unit. Fund S makes a payment of a further 30 cents on each unit in March 2009. A payment of a further 20 cents a unit is made in December 2009. A total of 80 cents of the $1 payment per unit has been made before 1 July 2009.In this case, the units are not treated as in-house assets prior to December 2009 (until then, all payments had been made before 1 July 2009). From December 2009 (when 20 cents a unit is paid) 20 per cent of the market value of units will be included in the funds in-house assets. For instance, if the market value of a unit was $1.20 at June 2010, 24 cents a unit would be included in the funds in-house assets. This is shown in the formula below.

Market value of share or unit * (Excess amount / Total amount)
= $1.20 * ($0.20 / $1.00) = $0.24

Exceptions - pre-12 May 1998 leases and lease arrangements (Section 71B)

Section 71B provides an exemption from the new in-house asset provisions for assets that were originally subject to a lease before 7:30 p.m. 12 May 1998, or were subject to a lease or legally binding lease arrangement entered into prior to that date.

Subsection 71B(1) exempts an asset from being an in-house asset of a superannuation fund if:

(a)
at any time (the post-test time) after 7.30 p.m. 12 May 1998, an asset of a superannuation fund consists of an asset subject to a lease, or a lease arrangement, between the trustee of a fund and a related party of the fund; and
(b)
the asset was subject to a lease or lease arrangement, or any uninterrupted sequence of leases and lease arrangements, between the trustee of a fund and a related party (not necessarily the same related party), throughout the period beginning immediately before 7.30 p.m. 12 May 1998 and ending at the post-test time.

Subsection 71B(2) ensures that assets subject to leases or lease arrangements that are enforceable by legal proceedings, which were entered into before 7.30 p.m. 12 May 1998, and came into force afterwards, are eligible for the exemption given by subsection 71B(1).

Exceptions - transition period (Section 71C)

Section 71C provides an exemption from the new in-house asset provisions, for investments and loans made, and assets that became subject to a lease, during the period between 7:30 p.m. 12 May 1998 and when the legislation receives Royal Assent. This exemption will only apply to the assets until 1 July 2001, after which time the assets will be subject to the new rules.

Investments and loans

Subsection 71C(1) exempts an asset from being an in-house asset of a superannuation fund at a time before 1 July 2001 if the asset is an investment or loan made between 7:30 p.m. 12 May 1998 and the date the legislation receives Royal Assent. This applies if the asset would not have been an in-house asset prior to the amendments in this Bill.

This section does not apply if the loan or investment was made under a contract entered into before the beginning of that period (these assets are covered by section 71A).

Leases and lease arrangements

Subsection 71C(2) exempts an asset from being an in-house asset of a superannuation fund at a time before 1 July 2001, if it is an asset subject to a lease, or a lease arrangement, between the trustee of a fund and a related party of the fund. This applies if:

(a)
the asset became subject to a lease or lease arrangement between the trustee of a fund and a related party between 7:30 p.m. 12 May 1998 and the date the legislation receives Royal Assent (the transition period); and
(b)
the asset was subject to a lease or a lease arrangement, or any uninterrupted sequence of leases and lease arrangements, between the trustee of a fund and a related party (not necessarily the same related party), throughout the period beginning during the transition period and ending at the pre-1 July 2001 time.

Section 71C does not apply to a leased asset if the leased asset is not an in-house asset through the operation of section 71B.

Exception - reinvestments (Section 71D)

Section 71D exempts certain investments from inclusion as in-house assets of a superannuation fund, where the investments represent reinvestment of earnings.

This applies where a superannuation fund had originally invested in a company or trust before 7:30 p.m. 12 May 1998 and the superannuation fund makes further investments into the entity (the original entity) between 7:30 p.m. 12 May 1998 and 30 June 2009.

At any time, an investment will not be treated as an in-house asset if the sum of the purchase prices of the investment and any previous investments to which this section applies does not exceed the sum of the following amounts:

(i)
the sum of the amounts of all dividends or trust distributions received after the test time, but before the end of 30 June 2009, by the superannuation fund from the original entity, which were derived from an investment in the original entity made by the fund before the test time;
(ii)
the sum of the amounts of all dividends or trust distributions received after the test time, but before the end of 30 June 2009, by the superannuation fund, which were derived from investments of dividends and trust distributions taken into account under subparagraph (i) or this subparagraph.

This exemption applies only if the investments would not have been in-house assets prior to the amendments in this Bill. This section does not apply to investments in assets that are not in-house assets due to the operation of section 71A.

The assets covered by this exception (made before 1 July 2009) will continue to be excluded from being in-house assets after 1 July 2009.

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.

Exception - certain geared investments (Section 71E)

Section 71E provides an alternative transitional arrangement for funds with fewer than 5 members. It allows additional investments in, or loans to, a unit trust or company between 7.30 p.m. 12 May 1998 and before 1 July 2009.

The assets acquired will not be treated as in-house assets if the total amount of additional investments or loans does not exceed the entitys debt (to entities other than the superannuation fund) at 7.30 p.m. 12 May 1998.

This transitional provision will apply only if the trustee of the fund makes a written election no later than twelve months after the Bill receives Royal Assent (or later if allowed by regulations). If the election is made, then this transitional provision will apply to all of the investments and loans made by the superannuation fund to that entity after 7.30 p.m. 12 May 1998 and before 1 July 2009 (including those made before the election).

If an election is made, the transitional arrangements under section 71A and section 71D will not apply to investments in and loans to that entity made after 7.30 p.m. 12 May 1998. That is, the section 71E transitional arrangement is an alternative to using the transitional arrangements for payments on partly paid shares and units (under section 71A), for investments and loans under pre-12 May 1998 contracts (under section 71A), and for reinvestment of earnings (under section 71D).

Subsection 71E(4) applies if the sum of the purchase prices of all investments made in the related entity after 7.30 p.m. 12 May 1998 exceeds the entitys 12 May 1998 debt. In this case, the investment that results in the debt limit being exceeded will be treated as an in-house asset, but with only a proportion of its market value included in the in-house asset ratio. This will be based on the proportion of the purchase price that exceeds the debt limit, as given by the formula below. Investments made after the debt limit has been exceeded will be in-house assets of the fund.

Market value of post-test time investment * (Excess amount / Purchase price of post-test time investment)

The following examples illustrate the application of the section 71E transitional arrangement.

Example 1 Superannuation fund Z invested in unit trust Y before 12 May 1998 (by acquiring units in the trust). The unit trust borrowed from a bank and $100,000 was outstanding at 12 May 1998. Trust Y is a related trust of fund Z.The superannuation fund makes a further investment into the unit trust of $50,000 in December 1998. In March 2000, the trustee of fund Z makes an election that section 71E will apply to investments by fund Z into trust Y after 12 May 1998. In April 1999, the fund makes a further investment of $50,000.Because an election has been made, all investments by fund Z into trust Y that are made between 7.30 p.m. 12 May 1998 and 1 July 2009 count against the $100,000 debt limit. The investments made in December 1998 and April 1999 will not be counted as in-house assets because they fall within the $100,000 limit. Any further investment by fund Z into trust Y will be in excess of the $100,000 limit and will therefore be an in-house asset.

Example 2 Fund P invested in unit trust Q before 12 May 1998. Trust Q borrowed from a bank and $80,000 was outstanding at 12 May 1998. Trust Q is a related trust of fund P.The trustee of fund P makes an election that section 71E will apply to investments by the fund in the trust. Sections 71A and 71D therefore do not apply to any investments made by fund P in trust Q after 12 May 1998.The fund makes further investments of $50,000 in June 2000 and $60,000 in June 2001. The $60,000 consists of payments on partly paid units in trust Q that fund P acquired before 12 May 1998.The $50,000 June 2000 investment is under the debt limit. Therefore, the investment made in June 2000 is not an in-house asset. $30,000 of the $60,000 June 2001 investment is in excess of the debt limit, and thus part of this investment is included in the calculation of the in-house asset ratio of the fund. The amount to be included is shown in the formula below.

Market value of post-test time investment * (Excess amount / Purchase price of post-test time investment)
= $60,000 * ($30,000 / $60,000) = $30,000

By June 2005, the investment made in June 2001 has a market value of $70,000. Therefore, at June 2005, the amount included in the in-house assets of the fund is $35,000 (as shown in the formula below).

Market value of post-test time investment * (Excess amount / Purchase price of post-test time investment)
= $70,000 * ($30,000 / $60,000) = $35,000

Meaning of certain terms used in Subdivision D

Section 71F defines the terms test time and transition period for the purposes of this Subdivision.

Test time means 7:30 p.m. by legal time in the Australian Capital Territory on 12 May 1998.

Transition period means the period:

(a)
beginning at the test time; and
(b)
ending at the time at which the Superannuation Legislation Amendment Bill (No. 4) 1999 received Royal Assent (that is, the date that the Act commences).

Section 72: Application of Part 8 where there are 2 or more employer-sponsors

Section 72 of the SIS Act determines how the in-house asset rules apply to a superannuation fund where there are two or more employer-sponsors, of whom at least one is an unrelated employer-sponsor.

Items 35 - 40

Items 35 and 36 amend existing references to associate in section 72 to Part 8 associate.

Item 37 amends paragraph 72(2)(a), expanding the class of in-house assets that correspond to an unrelated standard employer-sponsor, to include:

(i)
loans to, investments in, or assets subject to leases or lease arrangements with the employer-sponsor; or
(ii)
loans to, investments in, or assets subject to leases or lease arrangements with a standard employer-sponsored member of the fund, in respect of whom the employer-sponsor contributes to the fund, or a Part 8 associate of such a member; or
(iii)
investments in a trust that is controlled by an entity referred to in subparagraph (i) or (ii).

Item 38 amends paragraph 72(2)(b), expanding the class of in-house assets that correspond to a group of related standard employer-sponsors, to include:

(i)
loans to, investments in, or assets subject to leases or lease arrangements with any of them or a Part 8 associate of any of them; or
(ii)
loans to, investments in, or assets subject to leases or lease arrangements with a standard employer-sponsored member of the fund, in respect of whom any of them contributes to the fund, or a Part 8 associate of such a member; or
(iii)
investments in a trust that is controlled by an entity referred to in subparagraph (i) or (ii).

Paragraph 72(5)(b) states that when calculating an in-house asset ratio with respect to each asset class within the fund, the corresponding class of in-house assets is to be treated as the whole of the in-house assets of the fund. Item 39 effectively removes this paragraph, which is no longer necessary, as section 75 is amended to explicitly state how in-house asset ratios are to be calculated (see item 41 ).

Item 40 adds subsection 72(6) to the SIS Act, which states that section 72 does not apply to a self managed superannuation fund. Self managed superannuation funds will only be required to calculate the in-house asset ratio for the fund as a whole, not for each unrelated employer-sponsor, and group of related employer-sponsors.

Market value ratio of fund's in-house assets

Section 75 explains how the market value ratio of a funds in-house assets is calculated.

Item 41

This item adds new subsection 75(2), which explains how the market value ratio of a funds in-house assets is calculated as it applies to each of the corresponding classes of in-house asset of the fund.

Subsection 75(2) only applies when subsections 72(4) and (5) apply to a superannuation fund. Subsections 72(4) and (5) apply when a fund has two or more employer-sponsors, of whom at least one is an unrelated employer-sponsor (as described in subsection 72(3)).

For the purposes of the market value in-house asset ratio, any in-house asset that cannot be attributed to a standard employer-sponsor of the fund (for instance, a loan to a member who is not sponsored by a standard employer-sponsor) will be calculated on a whole of fund basis, and added to the class of in-house assets attributable to each unrelated employer-sponsor and group of related employer-sponsors.

The market value ratio of each of the corresponding classes of a funds in-house assets, as specified in subsection 75(2), is a percentage worked out using the formula:

((Number of whole dollars in value of in-house assets of corresponding class + Number of whole dollars in value of in-house assets that do not correspond to one or more employer-sponsors of the fund) / Number of whole dollars in value of all the assets of the fund) * 100

Item 42

Section 83 of the SIS Act prohibits the acquisition of an in-house asset by a superannuation fund if the acquisition would result in the market value ratio of the fund's in-house assets exceeding 5%.

This item adds subsection 83(4), which clarifies that for the purposes of section 83, the term acquiring an in-house asset includes any transaction (including the leasing of an asset) which results in an increase in the funds in-house assets.

Duty to keep minutes and records

Section 103 requires that minutes must be kept and retained of all meetings at which matters affecting the entity were considered, and records be kept and retained of all decisions made in respect of matters relating to the entity.

Item 43

This item adds subsection 103(2A) which requires the trustee or trustees of a superannuation fund that make an election under section 71E to use the exception for geared investments, to retain the election or a copy of the election for at least 10 years.

Item 44

This item applies the existing offence provision in section 103 to new subsection 103(2A).

Application provisions

Item 45

This item sets out when the amendments made by this schedule come into effect.

Amendments relating to the acquisition of assets

Subsection 1 states that the amendments made by items 9 and 10, 12 and 13, and 15 to 22 of this Schedule apply to the acquisition of an asset after the time at which the Superannuation Legislation Amendment Bill (No. 4) 1999 is introduced into the Parliament (the introduction time), unless the asset was acquired under a contract entered into before the test time (7:30 p.m. Australian Capital Territory legal time 12 May 1998). These amendments concern section 66.

Amendments relating to in-house assets - business real property

Subsection 2 states that the amendments made by items 11 and 14 of this Schedule apply to the acquisition of an asset after the test time. These amendments relate to allowing a superannuation fund with less than 5 members to acquire business real property.

Amendments relating to in-house assets - basic rule

Subsection 3 states that subject to Subdivision D of Division 1 of Part 8 of the Superannuation Industry (Supervision) Act 1993 , as inserted by this Schedule, the amendments made by items 23 to 28, 31 to 34, and 42 to 44 of this Schedule apply to making a loan or an investment after the test time, and to an asset subject to a lease or a lease arrangement after the test time. These amendments relate to Division 8 and the application of the in-house asset rules.

Amendments of subsection 71(2) and (3)

Subsection 4 states that the amendments made by items 29 and 30 of this Schedule apply to an agreement entered into after the introduction time, unless the agreement concerned is a contract that was entered into before the test time. These amendments relate to section 71.

Amendment of sections 72 and 75

Subsection 5 states that the amendments made by items 35 to 41 of this Schedule apply to the assets of a superannuation fund after the introduction time.

Criminal and civil penalties only apply after commencement

Subsection 6 states that despite the amendments made by this Schedule:

(a)
a person is not guilty of an offence; and
(b)
the consequences of contravening a civil penalty provision that are set out in Part 21 of the Superannuation Industry (Supervision) Act 1993 do not apply to a person;

in respect of conduct engaged in before the commencement of this Act, if the conduct would not have constituted an offence or contravention if those amendments had not been enacted.

Item 46

This item allows the Governor-General to make regulations providing for matters of a transitional nature in respect of the amendments and repeals made by this Act. Any regulations made under this power must be consistent with Subdivision D of Division 1 of Part 8 of the SIS Act.


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