Practice Statement Law Administration

PS LA 2009/8

SUBJECT: The Commissioner's determination under paragraph 71(1)(e) of the Superannuation Industry (Supervision) Act 1993 that an asset is not an in-house asset of a self-managed superannuation fund
PURPOSE: To outline the circumstances where the Commissioner would exercise his discretion to issue a determination that an asset is not an in-house asset

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TABLE OF CONTENTS Paragraph
BACKGROUND
1
STATEMENT
10
EXPLANATION
23
Factors taken into account when deciding to exercise an unfettered discretion
Exercise of the discretion under paragraph 71(1)(e)
Circumstances considered unusual or out of the ordinary
Example 1 - legislative changes such as the introduction of registrable superannuation entity licence
Example 2 - state or territory law changes result in water access rights being recognised as assets separate from underlying business real property primary production land
Circumstances not considered unusual or out of the ordinary
Fluctuations in economic conditions
The trustee is not aware of the requirements of the in-house asset rules
Example 3 - failure to identify an investment as an in-house asset
Example 4 - Example 4 - failure to identify a separate water access entitlement (WAE) as not being business real property of the fund
The trustee relies on the exercise of due care and diligence by a professional and necessary advice is not provided
There is a significant benefit to the fund from the investment
Example 5 - significant benefit to the fund by the investment
The trustee does not want to incur any difficulties or costs in keeping the in-house assets under the 5% limit
There is a failure to satisfy the exclusion to the in-house asset definition in paragraph 71(1)(j)
Example 6 - an investment no longer satisfies one of the requirements in regulation 13.22D
The expiration of the transitional provisions on 30 June 2009
The Commissioner issues a determination under paragraph 71(1)(e)
The Commissioner revokes a determination under paragraph 71(1)(e)
The Commissioner's refusal to issue or decision to revoke a determination under paragraph 71(1)(e)

This practice statement is issued under the authority of the Commissioner of Taxation and must be read in conjunction with Law Administration Practice Statement PS LA 1998/1. It must be followed by tax officers unless doing so creates unintended consequences or where it is considered incorrect. Where this occurs tax officers must follow their business line's escalation process.
Taxpayers can rely on this practice statement to provide them with protection from interest and penalties in the way explained below. If a statement turns out to be incorrect and taxpayers underpay their tax as a result, they will not have to pay a penalty. Nor will they have to pay interest on the underpayment provided they reasonably relied on this practice statement in good faith. However, even if they don't have to pay a penalty or interest, taxpayers will have to pay the correct amount of tax provided the time limits under the law allow it.

BACKGROUND

1. All legislative references in this practice statement are to the Superannuation Industry (Supervision) Act 1993 (SISA) unless otherwise indicated. All references in the practice statement to SMSFs include former SMSFs unless otherwise indicated.

2. The Commissioner of Taxation (Commissioner) has the general administration of Part 8 to the extent that the Part relates to self-managed superannuation funds (SMSFs).[1] Part 8 contains the in-house asset rules that apply to regulated superannuation funds.

3. The primary policy objective of the in-house asset rules in Part 8 is 'to ensure that the investment practices of superannuation funds are consistent with the Government's retirement incomes policy. That is, superannuation savings should be invested prudently, consistent with the SISA requirements, for the purpose of providing retirement income and not for providing current day benefits'.[2]

4. Subject to some exceptions, an in-house asset of a superannuation fund is an asset of the fund that is:

·
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.[3]

5. However, not all assets of the fund that meet the descriptions in paragraph 4 of this practice statement are in-house assets. Part 8 contains a number of exclusions to the general definition of an in-house asset,[4] including transitional provisions which apply to certain related party assets which were held at 11 August 1999 and were not in-house assets of the SMSF prior to that date.[5] In addition, particular regulations specify exclusions to the in-house asset definition for a class of assets or a class of funds.[6]

6. Part 8 limits the value of in-house assets that a trustee of a superannuation fund may acquire and hold to 5% of the market value of the fund's total assets.[7] If the 5% limit is breached, the trustee is required to make and implement a plan to reduce the level of the fund's in-house assets to 5% or below before the end of the following year of income.[8]

7. The Commissioner, as the Regulator of SMSFs under the SISA, has the power to make a determination under paragraph 71(1)(e) that a particular asset of an SMSF is not, or will not be, an in-house asset of the fund.

8. A determination may be made with retrospective effect.[9] It may also be revoked.[10]

9. A decision of the Commissioner refusing to make (or a decision to revoke) a determination is a reviewable decision.[11] A trustee affected by the Commissioner's decision may, if dissatisfied with the decision, request the Commissioner to reconsider.[12]

STATEMENT

10. The policy in this practice statement applies to SMSFs[13] and former SMSFs.[14]

11. In considering whether to make a determination under paragraph 71(1)(e), the Commissioner will take into account all relevant facts and circumstances of the case.

12. The Commissioner may consider it appropriate to issue a determination if:

·
the facts of the case indicate circumstances that are unusual or out of the ordinary, and
·
by making the determination it will not undermine the purpose of the in-house asset rules in Part 8.

13. The Commissioner may consider circumstances to be unusual or out of the ordinary where:

·
a trustee of an SMSF has complied with the SISA requirements in investing the fund's assets
·
certain events occur, which are unforeseeable and beyond the trustee's control, and
·
these events when they relate to the fund result in the in-house assets of the fund exceeding the 5% in-house asset limit.

14. Examples of such circumstances that are unusual or out of the ordinary include (but are not limited to) where legislative change leads to assets, previously excluded under the transitional provisions, being transferred to new SMSFs and becoming in-house assets. See Example 1.

15. Where the circumstances are considered unusual or out of the ordinary, the Commissioner may issue a determination under paragraph 71(1)(e) if it is not inconsistent with the intent of the in-house asset rules. The in-house asset rules require assets of a fund to be invested prudently, consistent with the SISA requirements, and only for the purpose of providing retirement income for members and not for providing current day benefits.

16. Without further relevant facts, the Commissioner would not normally consider the circumstances as unusual or out of the ordinary where the in-house assets of the fund exceed the 5% in-house asset limit as a result of the following events:

·
fluctuations in economic conditions
·
the trustee is not aware of the requirements of the in-house asset rules
·
the trustee relies on the exercise of due care and diligence by a professional and necessary advice is not provided
·
there is a significant benefit to the fund from the investment
·
the trustee does not want to incur any difficulties or costs in keeping the in-house assets under the 5% limit
·
there is a failure to satisfy the exclusions to the in-house asset definition specified by regulation under paragraph 71(1)(j), or
·
the transitional provisions allowing additional investments in particular related party assets expired at 30 June 2009 and further additional investments in assets of that kind are made after that date.

The Commissioner therefore would not ordinarily issue a determination that an asset is not an in-house asset of the fund for the events listed above. However, these circumstances will be taken into account when considering whether to exercise the Commissioner's discretion under subsection 42A(5) to allow the fund to maintain its complying status in relation to the year of income.[15]

17. The decision to issue a determination under paragraph 71(1)(e) must be approved by an Executive Level 2 (EL2) tax officer or above. When making a recommendation to the EL2 tax officer, a tax officer is required to provide them with sufficient information to approve the issue of a determination.

18. A determination under paragraph 71(1)(e) is issued to a specific SMSF in relation to its particular assets and on the basis of its particular facts and circumstances. Therefore a determination cannot be relied on by other SMSFs even if their situation is argued to be the same. A trustee of an SMSF that seeks an exercise of the Commissioner's discretion to issue a determination should apply on behalf of their fund.

19. A determination under paragraph 71(1)(e) may be made on a prospective or retrospective basis.

20. A determination under paragraph 71(1)(e) can be issued on a conditional basis where it is expressed to include facts and circumstances that the Commissioner considers relevant in exercising the discretion. The determination continues to apply as long as the facts and circumstances that justified exercising the discretion continue into the future.

21. The Commissioner may revoke a determination issued under paragraph 71(1)(e). This practice statement does not examine the timing of a revocation. To ensure full consideration, approval of the revocation by the relevant Senior Executive Service (SES) officer in the Superannuation Business line is required. The need for escalation to any other area will be in accordance with the Superannuation Business line's work practices.

22. If the determination ceases to apply because the facts are no longer as set out in the determination or the conditions are no longer satisfied, the Commissioner is not required to revoke the determination.

EXPLANATION

23. Paragraph 71(1)(e) does not specify the form or timeframe in which a request for a determination is to be made. However, the Commissioner will ordinarily consider a determination request from a trustee of an SMSF when it is in writing and contains all necessary information for the Commissioner to make a decision regarding the request.

24. Paragraph 71(1)(e) does not provide any criteria limiting when the Commissioner may exercise the discretion to issue a determination nor does it provide any guidance as to when it would be appropriate. While the Commissioner's discretion to issue a determination is unfettered, it does not mean the power can be exercised on any basis. It must be exercised by reference to the legislative context in which it appears.

25. The Commissioner will consider the policy intent of imposing limits on investments in in-house assets when making a decision on whether to issue a determination that a particular asset not be an in-house asset of an SMSF. This decision will be made by taking into account the facts and circumstances of the individual case. As a guiding principle, the Commissioner may exercise the discretion and issue a determination if:

·
there are circumstances that are unusual or out of the ordinary, and
·
the issue of the determination would not undermine the purpose for which the in-house asset rules in Part 8 were introduced.

Factors taken into account when deciding to exercise an unfettered discretion

26. Before determining whether it is appropriate to exercise the discretion, the Commissioner must consider the scope and purpose of the in-house asset rules, and thus ensure that the exercise of the discretion is consistent with the identified purpose.

27. In Shrimpton v. The Commonwealth (1945) 69 CLR 613, the High Court considered the Treasurer's power to approve purchases of land; at page 620 Latham CJ commented:


Accordingly, it should be held that the discretion entrusted to the Treasurer must be exercised for the purpose of attaining the object and securing the purpose of the Regulations, such object and purpose being ascertained by an examination of the terms of the Regulations.

28. Later in Water Conservation and Irrigation Commissioner (NSW) v. Browning (1947) 74 CLR 492; at page 496 Latham CJ also stated that:


On several occasions this Court has had to consider provisions vesting a wide discretion in an administrative body and to consider whether the discretion was intended by the legislature to be absolutely unlimited ... The intention of the legislature is to be ascertained from the words of the statute as applied to the subject matter with which the statute deals.

29. In the case of Minister of Aboriginal Affairs v. Peko-Wallsend Ltd. (1986) 162 CLR 24, at pages 39 - 40, Mason J stated:


If the relevant factors - and in this context I use the expression to refer to the factors which the decision-maker is bound to consider - are not expressly stated, they must be determined by implication from the subject matter, scope and purpose of the Act.

30. In Re Chief Commissioner of State Revenue v. Pacific General Securities Ltd and Finmore Holdings Pty Ltd (No. 2) [2005] NSW ADTAP 54, the New South Wales Administrative Decisions Tribunal Appeal Panel considered an appeal against the exercise of an unfettered discretion by the NSW Administrative Decisions Tribunal. Referring to dispensing powers in revenue legislation, the Appeal Panel stated at paragraph 29:


The discretion belongs to a context. The discretion must be applied in a manner which does not defeat the fundamental legislative objectives of the scheme of regulation within which the dispensing power is located. It is a relief mechanism for hard cases.

31. When describing how the discretion was to be applied, the Appeal Panel noted at paragraph 31:


On its face there is nothing special about this transaction, and there would have to be some unusual or special considerations which would take the case outside the normal application of duty. To use the discretion to relieve a purchaser from duty would require special justification. A dispensing power should not lightly be applied.

32. Further, at paragraph 39:


We see the purpose of the kind of discretion given by s 25(2) as to provide a measure of discretion to deal with unforeseen consequences, anomalies or unexpected outcomes (such as the unexpected application of more than one head of duty). The discretion might be open to be applied also where there is an unexpected social policy consequence of a taxation measure which should be ameliorated in the short term, ahead possibly, in some instances, of amending legislation.

33. In JNVQ v Commissioner of Taxation [2009] AATA 522, when considering an appeal against the exercise of discretion to issue a notice of compliance by the Commissioner of Taxation, Carstairs MJ stated at paragraph 41:


Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects.

34. Therefore, to justify the Commissioner's decision to issue a determination under paragraph 71(1)(e), there needs to be something unusual or out of the ordinary about the situation. The power to exercise the discretion allows the Commissioner to deal with unforseen consequences, anomalies or unexpected outcomes.

Exercise of the discretion under paragraph 71(1)(e)

35. The fact that paragraph 71(1)(e) does not provide any limits to a discretionary power does not mean that the power can be exercised on any basis. Rather the discretion should be exercised consistently with the scope and purpose of the legislation in which it appears.

36. The broad definition of an in-house asset indicates that the provision was intended to identify a wide range of assets of the superannuation fund that were exposed to or contribute to the financial viability of a related party of the SMSF. This is consistent with the primary policy objective of Part 8, which is to ensure that the investment practices of superannuation funds are consistent with the Government's retirement incomes policy.

37. Rather than making a judgment about the quality of an in-house investment, the in-house asset rules simply limit the amount of investment in a related party to 5% of the market value of the fund's total assets. The main aim is to reduce the risk to superannuation savings.

38. In Administrative Appeal Tribunal Case [2000] AATA 238 44 ATR 1074, the purpose of the in-house investment limits was mentioned by McMahon BJ (Deputy President) at paragraph 22:


The in-house investment limits are designed to ensure that the fates of the company [a related party] and of the Fund members are not inextricably linked.

39. The in-house asset rules have an object of not only ensuring prudential investment of savings, but also that these investments are consistent with SISA requirements to limit the risks associated with superannuation investments in related parties. Superannuation fund assets must be maintained for the purpose of providing retirement income for members, rather than providing current day benefits to members or any related party of the fund.

Circumstances considered unusual or out of the ordinary

40. In determining whether the circumstances of a given case are unusual or out of the ordinary, a tax officer should consider whether the resulting breach of the in-house asset rules is inadvertent, and has arisen through no fault of the trustee or the related party of the fund.

41. Circumstances may be considered unusual or out of the ordinary where a trustee of an SMSF has complied with all SISA requirements when investing the fund's assets, and certain events occurred, which are unforeseeable and beyond the trustee's control, causing the fund to exceed the 5% in-house asset limit.

42. 'Beyond the trustee's control' does not include circumstances where the trustee, due to their ignorance has no knowledge of, or participation, in the related party's business activities or decisions.

43. While each case must be determined on its facts, the following are examples of circumstances the Commissioner may regard as unusual or out of the ordinary. These examples are not designed to fetter the exercise of the Commissioner's discretion, but are for illustrative purposes only.

Example 1 - legislative changes such as the introduction of registrable superannuation entity licence

44. Following the introduction of the registrable superannuation entity (RSE) licence in 2004, trustees of some small APRA funds wanted to transfer their funds to SMSFs because they were unwilling to become licensed. Assets[16] which were not in-house assets of the APRA funds due to the operation of the transitional provisions would continue to be excluded from the in-house assets of the SMSFs if the APRA fund itself were to become an SMSF. However, if an APRA fund wished to divide, assets transferred from the former APRA fund to the new SMSFs would become in-house assets of the SMSFs because the transitional provisions would not apply to the new SMSFs that received the assets. In this scenario, the in-house assets of the SMSFs may have exceeded the 5% limit.

45. The Commissioner would regard the introduction of the licensing regime as unusual or out of the ordinary. This is because this situation was outside of the trustee's control and, at the time the assets which were not in-house assets of the APRA fund were acquired, the trustees of the APRA funds were not in a position to foresee the introduction of new licensing requirements.

46. Assets were acquired from the APRA funds when they were transferred to the new SMSFs. However, each member's rights, interests and entitlements in the assets of the SMSFs were effectively maintained in the same position as they would have been if the fund had not been split. The circumstances therefore made it possible for the Commissioner to conclude that the purpose of the in-house asset rules does not require the assets that were previously not in-house assets of the former APRA funds to be treated as in-house assets of the SMSF. As a result, the Commissioner issued a determination under paragraph 71(1)(e) excluding those assets from the definition of an in-house asset of the SMSFs.

47. To ensure that the same individuals retained their interest in the same assets, the determination was issued on a conditional basis by stipulating that all members of the new SMSFs were members of the former APRA fund and no new members be added into the fund until after 30 June 2009.[17]

48. If there were members in the SMSFs who were not members of the former APRA fund, the Commissioner would not issue a determination to provide the SMSFs relief from the in-house assets rules. Similarly, the determination would cease to take effect if new members were added to the fund before 1 July 2009.

Example 2 - state or territory law changes result in water access rights being recognised as assets separate from underlying business real property primary production land

49. A trustee of an SMSF acquires business real property (BRP) primary production land (along with the attached water rights) which the SMSF then leases to a related party. The land is used by the related party in carrying on a primary production business. At the time of acquisition the water rights are not recognised as a separate asset and the acquisition of the BRP primary production land is covered by the exception in paragraph 66(2)(b) and does not result in a contravention of the SISA. The leasing of the BRP primary production land is also covered by the in-house asset exception in paragraph 71(1)(g).

50. State or territory law changes have resulted in the water right being unbundled from the underlying BRP primary production land. This results in the SMSF holding two separate assets, being the BRP primary production land and the water right (commonly referred to after separation as a water access entitlement (WAE)). The WAE, now recognised as a separate asset from the land, is no longer excluded by the business real property exception[18] when leased to a related party. It is therefore included as an in-house asset in working out if the 5% in-house asset limit has been exceeded.

51. The Commissioner considers the unbundling of the WAE from the related BRP primary production land under a state or territory law is an unusual or out of the ordinary event and the trustee complied with the SISA requirements when originally acquiring and leasing the BRP primary production land to the related party.

52. In these circumstances the Commissioner considers it appropriate to issue a determination under paragraph 71(1)(e) to exclude the WAE from being an in-house asset of the SMSF while ever:

·
the SMSF leases the BRP primary production land to a related party[19] of the SMSF; and
·
the BRP primary production land is used by the related party in carrying on a primary production business, and
·
the WAE continues to be used by the related party in carrying on that primary production business.

53. The issue of the determination thereby returns the SMSF and the members to the same position as before the unforseen event. It also ensures that no additional benefits are conferred upon the trustee or the members beyond those that were in place before the unbundling of the WAE.

54. On the day that any of these circumstances are no longer satisfied, the determination will cease to apply. On that day the WAE will no longer be excepted under paragraph 71(1)(e) and the WAE will be an in-house asset of the SMSF.

Circumstances not considered unusual or out of the ordinary

55. The Commissioner would not ordinarily issue a determination that an asset is not an in-house asset of the fund where the circumstances are not considered unusual or out of the ordinary. The circumstances however will be taken into account when considering whether to exercise the Commissioner's discretion under subsection 42A(5) to allow the fund to maintain its complying status in relation to the year of income.[20] The circumstances are generally not considered unusual or out of the ordinary where the in-house assets of the fund exceed the 5% in-house asset limit as a result of the following events.

Fluctuations in economic conditions

56. The Commissioner will not ordinarily consider a decrease in market value of the fund's assets due to fluctuations in economic conditions to be sufficient reason in itself to exercise the discretion. While the circumstances may be outside of the trustee's control, fluctuations in values, including substantial fluctuations, are normal features of the financial market and other markets.

57. A fluctuation in economic conditions may result in a change in the market values of an SMSF's assets, such as shares and property. An economic downturn may cause the overall market value of the fund's assets to decrease, and this may cause the market value ratio[21] of the fund's in-house assets to exceed the 5% in-house asset limit.

58. Regardless of the magnitude of the change in the value of an investment due to fluctuations in economic conditions, it would be contrary to the object of the in-house asset rules for in-house assets with a value in excess of 5% of the total asset value to be permitted merely because of a decline in the value of an investment.

The trustee is not aware of the requirements of the in-house asset rules

59. Failure to comply with the in-house asset rules because the trustee was not aware of the requirements will not be considered unusual or out of the ordinary.

60. A trustee of an SMSF is responsible for ensuring their fund is properly managed and complies with the SISA and all other relevant legislative and administrative requirements. To comply with their obligations, a trustee of an SMSF must keep themselves abreast of the requirements relevant to the operation of the fund (this may include seeking professional advice). Therefore, a trustee who seeks to acquire an asset for the fund will need to determine whether the investment is excluded from the definition of in-house asset, and if not, the trustee has to comply with the requirements of the in-house asset rules.

61. In considering whether ignorance of the law can be regarded as special circumstances, McMahon B J (Deputy President) in Administrative Appeal Tribunal (AAT) Case 9432 (1994) 28 ATR 1058; Case 17/94 94 ATC 198, at paragraph 20 stated:


Ignorance of the law ...is difficult to regard as special circumstances where the trustee has had ample opportunities to seek advice.

Example 3 - failure to identify an investment as an in-house asset

62. The partners of a partnership decide to operate a new business through a unit trust. The trustees of the SMSFs associated with those partners also invest in the same unit trust. Each partner of the partnership is a related party, thus each fund that a partner is a member of, is also a related party. As SMSFs associated with the partners hold more than 50% of the units in the unit trust, the trust is defined to be a related party of the funds.[22] Since no exclusion to the in-house asset definition applies, all investments in the unit trust by trustees of the SMSFs associated with the partners are in-house assets.

63. Failing to identify the unit trust as a related party of the fund, before making the investment, is not considered a circumstance outside of the trustees' control.

Example 4 - failure to identify a separate water access entitlement (WAE) as not being business real property of the fund

64. A trustee of an SMSF acquired both business real property primary production land and a WAE which it then leased to a related party. At the time the assets are acquired and leased, the WAE is recognised by the relevant state or territory law as a separate asset from the land. The land and the WAE are used by the related party in carrying on a primary production business.

65. As the freehold interest in the land is business real property at all times, the land is excepted from the definition of in-house asset when leased to a related party.[23] The WAE, being a separate asset from the land, is not an eligible interest in real property and therefore cannot be business real property of the fund.[24] Since no exclusion to the in-house asset definition applies to the separate WAE, it is an in-house asset of the fund when leased to a related party and subject to the 5% in-house asset limit.[25]

66. The trustee's failure to identify the separate WAE as an in-house asset of the fund when leased to a related party is not considered to be an unusual or an out of the ordinary event which was unforeseeable or beyond the trustee's control.

The trustee relies on the exercise of due care and diligence by a professional and necessary advice is not provided

67. Failure to comply with the in-house asset rules when investing the fund's assets because the trustee relies on the exercise of due care and diligence by a professional, and necessary advice is not provided, will generally not be considered unusual or out of the ordinary.

68. A trustee of an SMSF may use services of a professional to complete certain tasks on their behalf, for example, a tax agent to lodge the fund's annual return or an investment advisor or accountant for investment or financial advice. However, the trustee of an SMSF is still solely responsible and accountable for managing and making all decisions relevant to the operation of the fund.

69. In AAT Case 9537 (1994) 28 ATR 1220; Case 33/94 94 ATC 306, the fund was in breach of the in-house asset rule. The trustee claimed that he did not receive advice from his accountant in relation to the loans of the fund and the Commissioner should exercise his discretion. The Tribunal, in affirming the Commissioner's decision not to allow the fund to maintain the tax-exempt status at page 314, was satisfied that:


The trustee of the fund had an obligation to inform himself of the true factual situation at or prior to the time he signed the return. Reliance upon the accountants, even be it that they have done all they could by reason of the letter to inform the trustee of the situation, does not constitute a special circumstance.

There is a significant benefit to the fund from the investment

70. There is nothing within the in-house asset rules that considers the quality of a particular investment. A significant benefit to the fund from the investment will not be considered unusual or out of the ordinary.

71. In AAT Case 9432 (1994) 28 ATR 1058; Case 17/94 94 ATC 198, McMahon B J (Deputy President) when considering whether there were special circumstances in respect to a particular investment stated at paragraph 21:


The fact that there was a benefit to the fund by the investment, that the fund was a small one, and that there was no detrimental effect to the assets of the fund caused by anything resembling a speculative investment do not, it seems to me, take the matter out of the ordinary course. These facts do nothing to distinguish the present circumstances from those of a host of other funds in other contexts.

Example 5 - significant benefit to the fund by the investment

72. Trustees of two related SMSFs combine their resources and invest almost their entire assets into a related unit trust. Aiming to improve the risk/return outcomes for the unit holders (which are trustees of the two SMSFs), the trustee of the unit trust buys shares in a company. This results in the unit trust holding interests in another entity. As no exclusion of the in-house asset definition applies, investments of the two funds in the unit trust are in-house assets of the funds. The value of each fund's in-house assets is more than 5% of the value of the fund's total assets.

73. The fact that there were significant benefits to the fund by the investment does not 'take the matter out of the ordinary course'.[26] While it can be said that the trustees of the SMSFs have succeeded in gaining greater buying power by making large investments through the unit trust, they have failed to comply with the in-house asset rules. The circumstances will not be considered unusual or out of the ordinary.

The trustee does not want to incur any difficulties or costs in keeping the in-house assets under the 5% limit

74. If a trustee of an SMSF decides to make investments in related parties, and the investments are in-house assets of the fund, the trustee is required to ensure the fund's in-house asset level is kept under the 5% limit. Where a fund's in-house assets exceed 5%, some options available to the trustee in reducing the in-house asset level will be to:

·
dispose of some or all of the in-house assets so that the 5% in-house asset market value ratio is no longer exceeded; and/or
·
acquire additional non in-house assets so that the 5% in-house asset market value ratio is no longer exceeded.

75. In undertaking any of the above options, the trustee may incur some difficulties and costs, such as administrative and transaction costs, income tax and/or capital gains tax implications. The difficulties and costs the trustee may incur in fulfilling this requirement are not considered of themselves to be unusual or out of the ordinary. Therefore the trustee would not be likely to be able to obtain a favourable determination under paragraph 71(1)(e).

There is a failure to satisfy the exclusion to the in-house asset definition in paragraph 71(1)(j)

76. Paragraph 71(1)(j) allows regulations to be made specifying a class of assets not to be in-house assets of any fund or of a class of funds in which the fund belongs. Correspondingly, Division 13.3A of the SISR was introduced to allow SMSFs to invest in certain related company and unit trusts where specific requirements are met. These requirements are designed to maintain the objectives of the investment rules that apply directly to SMSFs.[27]

77. If one of the specific requirements is breached, for example, an event in regulation 13.22D occurs; the exclusion to the definition of in-house asset ceases to apply to all existing and future investments by the fund in the related company or unit trust, regardless of whether the event is corrected.[28]

78. The words of the regulations make it clear that a one off breach of the requirements and consequently a failure to satisfy the conditions specified in the paragraph 71(1)(j) for the exclusion to apply would prevent an investment in that company or unit trust from being eligible for that concessional exclusion from being an in-house asset ever again. This is a deliberate policy of the government.[29]

79. A trustee of an SMSF who wants to use the concession under the regulations is required to have a detailed ongoing knowledge of the activities of the related company or unit trust. The trustee has an option of using the concession, and to judge whether the benefits of the concession outweigh the associated compliance costs.

80. Therefore, if the trustee of an SMSF decides to use the concession and there has been a breach of a specific requirement by the related company or trust, the Commissioner would not consider this as an unusual or out of the ordinary circumstance.

Example 6 - an investment no longer satisfies one of the requirements in regulation 13.22D

81. A trustee of an SMSF invests in a related unit trust and due to the operation of regulation 13.22C, the investment is excluded from the definition of in-house asset. The trustee of the unit trust buys shares in a company for the unit trust. This would result in the unit trust holding an interest in another entity which would be an event in regulation 13.22D. This would cause any investments of the fund in the unit trust to become in-house assets of the fund. As a result of this, the fund's in-house assets exceed the in-house asset limit.

82. The happening of the event, that is buying shares in a company, was not outside of the control of the trustee of the related unit trust. Therefore, there are likely to be no unusual or out of the ordinary circumstances which might take the case out of the intended operation of regulation 13.22D.

The expiration of the transitional provisions on 30 June 2009

83. The Commissioner will not ordinarily consider the circumstances unusual or out of the ordinary if the fund exceeds the in-house asset limit because:

·
there are additional investments in relation to existing related party assets
·
the existing assets were excluded from being in-house assets under the transitional provisions, and
·
these additional investments were made after 30 June 2009.

The circumstances are not unusual or out of the ordinary because it is foreseeable that any additional investments made after 30 June 2009 in existing related party assets would be in-house assets of the fund.

84. A trustee of an SMSF has a choice whether to use a transitional arrangement and continue to make additional investments in relation to existing related party assets, only until 30 June 2009, or make new investments that are not in-house assets. If the trustee takes advantage of the transitional provisions, they need to identify pre and post 11 August 1999 assets and liabilities and monitor future investments and flow of funds to ensure there are no additional investments or payments into those identified pre 11 August 1999 assets after 30 June 2009.

85. The underlying policy intent of the transitional provisions was to recognise the difficulties and costs that could be incurred by superannuation funds in unravelling existing investment arrangements. It is expected the period of 10 years given by the transitional provisions has been sufficient time for a trustee of an SMSF to unwind these investments by 30 June 2009, if required.

The Commissioner issues a determination under paragraph 71(1)(e)

86. The issue of a determination under paragraph 71(1)(e) to a particular SMSF that an asset of the fund is not an in-house asset could have a significant impact on the fund. Therefore, the issue of a determination must be approved by an EL2 tax officer or above. When making a recommendation to the EL2 tax officer, a tax officer is required to provide them with sufficient information to approve the issue of a determination.

87. Once issued, the determination will apply to the particular asset of the particular SMSF that has applied for the determination. It therefore does not apply to assets of any other SMSFs even if the funds are in what may appear to be the same situation. A trustee of an SMSF that seeks an exercise of the Commissioner's discretion to issue a determination should apply on behalf of their fund and set out the fund's particular situation.

88. A determination may be issued on a conditional basis to mitigate the risks identified. However, the conditions must support the purposes for which the discretion is conferred in paragraph 71(1)(e) and not some other objective. Latham CJ gave the following example in Shrimpton v. Commonwealth:


In Rossi v. The Edinburgh Corporation, [1905] AC 21, it was held that a power to grant a licence did not authorise the licensing authority to impose any conditions upon the grant of a licence which commended themselves to it irrespective of 'the object which the legislature must be presumed to have had in view' - p27.[30]

89. When specified conditions are no longer satisfied, the determination ceases to apply to the asset at that time and the asset is an in-house asset (assuming no other in-house asset exception is relevant).

The Commissioner revokes a determination under paragraph 71(1)(e)

90. The Commissioner may revoke a determination issued under paragraph 71(1)(e). This practice statement does not examine the timing of a revocation. To ensure full consideration, approval of the revocation by the relevant Senior Executive Service (SES) officer in the Superannuation Business line is required. The need for escalation to any other area will be in accordance with the Superannuation Business line's work practices.

The Commissioner's refusal to issue or decision to revoke a determination under paragraph 71(1)(e)

91. A decision of the Commissioner refusing to make (or a decision to revoke) a determination is a reviewable decision. The notification of the Commissioner's decision therefore must be accompanied by a statement of the Commissioner's reasons for the decision and a statement of review rights.[31]

92. A trustee who is affected by the Commissioner's decision refusing to make (or a decision to revoke) a determination may request the Commissioner to reconsider if the trustee is dissatisfied with the decision. The request must be made in writing, setting out the reasons for making the request, and must be made within 21 days after the day on which the trustee first received the notice of decision, or within such further period as the Commissioner allows.[32]

93. 93. If the trustee is still dissatisfied with the Commissioner's decision on reconsideration of the original decision, they may, in accordance with the rules in the Administrative Appeals Tribunal Act 1975, make an application to the Administrative Appeals Tribunal for a review of the Commissioner's decision to confirm or vary the original decision.[33]

Amendment history

Date of amendment Part Comment
30 March 2012 Contact details Updated contact officer, section and telephone number
16 August 2011 Paragraphs 67 and 93 and footnote 12 Minor revisions to clarify language.
21 February 2011 Paragraphs 20 to 22 New paragraphs covering conditional determinations, revoking determinations and why a determination does not get revoked.
Paragraphs 49 to 54 and 64 to 66 New examples covering water access entitlements.
Paragraph 88 Add that conditions must support the purpose for which discretion is conferred.
Paragraph 90 New paragraph covering revoking a determination.

Date of Issue: 15 October 2009

Date of Effect: 15 October 2009


Paragraph 6(1)(e).


The Senate - Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) of 1999 - Regulation Impact Statement.


Subsection 71(1). For discussion of the meaning of 'asset', 'loan', 'investment in', 'lease', 'lease arrangement', 'related party' and 'related trust' in the definition of an 'in-house asset' see Self Managed Superannuation Funds Ruling SMSFR 2009/04.


Paragraphs 71(1)(a) to 71(1)(j) and subsection 71(8) list assets of a superannuation fund that are not in-house assets.


The transitional provisions are contained in Subdivision D of Part 8 which includes sections 71A to 71F.


Divisions 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) which includes Regulation 13.22A to Regulation 13.22D.


Section 83.


Section 82.


Subsection 71(5).


Paragraph (j) of the definition of reviewable decision in subsection 10(1) provides that a decision to revoke a determination under paragraph 71(1)(e) is a reviewable decision. This implies that the determination under paragraph 71(1)(e) can be revoked.


'Reviewable decision' is defined in subsection 10(1) and paragraph (i) and (j) of that definition respectively include the refusal to make and the decision to revoke a determination under paragraph 71(1)(e).


Subsection 344(1). Subsections 344(2) and subsection 344(3) and Regulation 13.25 of the SISR set out requirements for making a request.


Self-managed superannuation funds are defined in section 17A.


A former SMSF is a superannuation fund that has ceased being an SMSF and has not appointed a registrable superannuation entity (RSE) licensee as trustee. It is treated as an SMSF for the purposes of sections 6, 42 and 42A - subsection 10(4).


Refer to Law Administration Practice Statement PS LA 2006/19 Self managed superannuation funds - notice of non-compliance for factors the Commissioner will consider in deciding whether to give an SMSF a notice of non-compliance.


Such assets include existing related party assets and additional investments or payments in relation to these assets.


The date the transitional provisions in section 71A to section 71F expire.


Self Managed Superannuation Funds Ruling SMSFR 2009/1 Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.


It does not affect the determination if the related party changes.


Refer to Law Administration Practice Statement PS LA 2006/19 Self managed superannuation funds - notice of non-compliance for factors the Commissioner will consider in deciding whether to give an SMSF a notice of non-compliance.


The market value ratio is the value of the fund's in-house assets as a proportion of the value of all assets of the fund.


Section 70B and subsection 70E(2) and 70E(3).


See paragraph 71(1)(g).


See SMSFR 2009/1, paragraphs 266-269.


In addition, if the trustee of the fund acquired the separate WAE from a related party, the trustee of the fund would contravene the related party asset acquisition rule in section 66.


AAT Case 9432 (1994) 28 ATR 1058; Case 17/94 94 ATC 198, paragraph 21.


Refer to the Explanatory Statement to the Superannuation Industry (Supervision) Amendment Regulations 2000 (No. 2), page 1.


Subregulation 13.22D(3). See paragraph 3 of the Self Managed Superannuation Funds Determination SMSFD 2008/1 Self Managed Superannuation Funds: how does the happening of an event in subregulation 13.22D(1) of the Superannuation Industry (Supervision) Regulations 1994 affect whether a self managed superannuation fund's investments in related companies or unit trusts are in-house assets of the fund?


'This subregulation ensures that if an investment by a superannuation fund in a company or unit trust becomes ineligible for the exception from the in-house assets rules, all other investments made by the fund in the company or trust are also ineligible for the exception' - see the Explanatory Statement to the Superannuation Industry (Supervision) Amendment Regulations 2000 (No. 2), page 5.


(1945) 69 CLR 613 at 619-620.


Subsection 345(1) and Regulation 13.24 of the SISR.


Subsection 344(1) to subsection 344(3) and Regulation 13.25 of the SISR.


Subsection 344(8) and Regulation 13.26 of the SISR.

File 08/12439

Related Rulings/Determinations:
Self Managed Superannuation Funds Ruling SMSFR 2009/04
Self Managed Superannuation Funds Determination SMSFD 2008/1
SPR 2006/MB1

Related Practice Statements:
PS LA 2006/19

Other References: Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 and Superannuation (Self Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006Explanatory Statement to the Superannuation Industry (Supervision) Amendment Regulations 2000 (No 2)

Subject References:
5% in-house asset limit
business real property
Commissioner's determination - an asset is not an in-house asset
Commissioner's discretion
Government's retirement incomes policy
in-house asset
lease
lease arrangement
loan
Part 8 associate
related party
related trust
regulated superannuation fund
reviewable decision
superannuation
transitional provisions

Legislative References:
SISA 6(1)
SISA 10(1)
SISA 17A
SISA 42A(5)
SISA 66
SISA 66(1)
SISA 66(2)(b)
SISA Pt 8
SISA Pt 8 Subdiv D
SISA 70B
SISA 70E
SISA 70E(2)
SISA 70E(3)
SISA 71
SISA 71(1)
SISA 71(1)(a)
SISA 71(1)(b)
SISA 71(1)(c)
SISA 71(1)(d)
SISA 71(1)(e)
SISA 71(1)(f)
SISA 71(1)(g)
SISA 71(1)(h)
SISA 71(1)(j)
SISA 71(5)
SISA 71(8)
SISA 71A
SISA 71A(1)
SISA 71B
SISA 71C
SISA 71D
SISA 71E
SISA 71F
SISA 82
SISA 83
SISA 344(1)
SISA 344(3)
SISA 344(8)
SISA 345(1)
SISR Pt 13 Div 13.3A
SISR 13.22A
SISR 13.22B
SISR 13.22C
SISR 13.22D
SISR 13.24
SISR 13.25
SISR 13.26
Administrative Appeals Act 1975

Case References:


Case [2000] AATA 238
44 ATR 1074

Case 9432
(1994) 28 ATR 1058

Case 17/94
94 ATC 198

Case 9537
(1994) 28 ATR 1220

Case 33/94
94 ATC 306

Re Chief Commissioner of State Revenue v. Pacific General Securities Ltd and Finmore Holdings Pty Ltd (No. 2)
[2005] NSW ADTAP 54
(2005) 63 ATR 127

JNVQ v Commissioner of Taxation
[2009] AATA 522

Minister of Aboriginal Affairs v. Peko-Wallsend Ltd
(1986) 162 CLR 24

Shrimpton v. The Commonwealth
(1945) 69 CLR 613

Water Conservation and Irrigation Commissioner (NSW) v. Browning
(1947) 74 CLR 492

Authorised by:
Stuart Forsyth
Assistant Commissioner
Superannuation

Business Line:  SPR

Other Business Lines consulted Compliance Support and Capability; Serious Non-compliance; Small Medium Enterprises; Micro Enterprises and Individuals; Marketing and Communications Lines; Operations and Law and Practice

PS LA 2009/8 history
  Date: Version:
  15 October 2009 Original statement
  21 February 2011 Updated statement
You are here 16 August 2011 Updated statement