House of Representatives

Tax Laws Amendment (2011 Measures No. 2) Bill 2011

Explanatory Memorandum

Circulated By the Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP

Chapter 2

Self managed superannuation fund investment in collectables and personal use assets

Outline of chapter

2.1 Schedule 2 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to permit the regulations to impose rules on self managed superannuation fund (SMSF) investment in collectables and personal use assets.

2.2 Schedule 2 also amends the SIS Act to remove a reference to a provision that was repealed on 24 September 2007.

2.3 This measure will have effect from 1 July 2011.

2.4 All legislative references in this chapter are to the SIS Act unless otherwise stated.

Context of amendments

2.5 Superannuation funds, including SMSFs, are generally free to invest in any asset they choose. However, taxation concessions are provided to superannuation savings with the objective of providing individuals with better income in retirement. Consequently, there are some rules on superannuation investments. The aim of these rules is to ensure that superannuation savings are accumulated for retirement income purposes, not current day benefit or estate planning.

2.6 These rules include that investments must be consistent with the sole purpose test in section 62 of the SIS Act, which, broadly, requires that superannuation funds must be maintained for the sole purpose of providing retirement income to members or, in the event of a member's death, to the member's dependants or legal personal representative. Although the sole purpose test covers all operations of the fund, in terms of investment this means that investments must be made solely for retirement income purposes.

2.7 In May 2009, the Government announced a review into the governance, efficiency, structure and operation of Australia's superannuation system. The Super System Review had the goal of ensuring that the superannuation system operates in the most cost effective manner and in the best interests of all its members.

2.8 The Super System Review's final report was released on 5 July 2010. The report made a number of recommendations regarding SMSFs, one of which was that SMSF investment in collectables and personal use assets should be prohibited and that existing SMSF holdings of these assets should be disposed of within five years.

2.9 The Super System Review panel found that investments in collectables and personal use assets pose issues in relation to the application of the sole purpose test. They argued that these investments lend themselves to personal enjoyment and therefore can involve current day benefits being derived by those using or accessing the assets. The panel argued that these assets should not be regarded as investments that build retirement savings and consequently should not be available to SMSFs.

2.10 An SMSF is a superannuation entity that has less than five members, all of whom are trustees of the fund or directors of the corporate trustee. A key characteristic of an SMSF is that all members are involved in the decision-making process and control the management of the fund.

2.11 SMSFs are subject to compliance-based regulation by the Australian Taxation Office (ATO), unlike most other superannuation funds which are subject to prudential regulation by the Australian Prudential Regulation Authority (APRA). SMSFs are subject to a less onerous prudential regime than APRA-regulated entities on the basis that all members of SMSFs are in a position to protect their own interests.

2.12 Given the closely-held nature of SMSFs, members have direct control over the investment of their superannuation savings and have the capacity to invest their money for their own current day benefit. The same risk does not exist in APRA-regulated funds, because the members in these funds have minimal control over investment decisions and are unlikely to receive any current day benefit from an investment.

2.13 It is extremely difficult for the ATO to determine the true purpose for which an investment in a collectable or personal use asset is made, particularly where the asset is 'stored' in premises owned by the SMSF trustee. As such, there are insufficient regulatory tools available to prevent SMSF investment in collectables and personal use assets giving rise to current day benefits for SMSF members.

2.14 On 30 July 2010, the Government announced, as an election commitment, that it does not support the Super System Review recommendation to prohibit SMSF investment in collectables and personal use assets, in recognition that collectables can be a legitimate investment for some SMSF trustees. However, the Government also announced that it would tighten the legislative standards applying to SMSF investment in collectables and personal use assets to ensure that such investments do not give rise to current day benefit for SMSF trustees.

Summary of new law

2.15 Schedule 2 amends the SIS Act to permit the regulations to impose rules on SMSF trustees that make, hold or realise investments involving collectables or personal use assets. Assets considered to be collectables and personal use assets are listed in the provisions.

2.16 This Schedule also amends the SIS Act to remove a reference to a provision that was repealed on 24 September 2007.

Comparison of key features of new law and current law

New law Current law
SMSF trustees must comply with any rules set by the regulations in relation to investments in collectables and personal use assets, in addition to the rules that also apply to other asset classes. SMSF trustees must comply with legislative rules which apply to all SMSF investments.
There is no reference to subsection 376(6) in paragraph 353(1)(d). There is a reference to subsection 376(6) in paragraph 353(1)(d).

Detailed explanation of new law

2.17 Currently, SMSF trustees may invest in a broad range of assets, provided the investments are permitted by the fund's trust deed and are in accordance with its investment strategy. The trustees must also comply with legislative rules, regardless of the asset class in which they invest. These amendments to the SIS Act provide for specific legislative rules to be applied solely to SMSF investments involving collectables and personal use assets.

2.18 Part 7 of the SIS Act sets out rules that apply only to regulated superannuation funds.

2.19 A new section is inserted into Part 7 to allow the regulations to prescribe rules that specifically relate to investments by an SMSF involving assets that are:

artwork (within the meaning of the Income Tax Assessment Act 1997 );
coins or medallions;
postage stamps or first day covers;
rare folios, manuscripts or books;
recreational boats;
memberships of sporting or social clubs; or
assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for personal use or enjoyment (not including land).

[ Schedule 2, item 1, section 62A ]

2.20 This measure applies not only where the asset is the primary investment but also where the asset is attached to an investment or is a related benefit of an investment.

Example 2.1 Jemma is a trustee of an SMSF. As trustee of her SMSF, Jemma makes an investment in XYZ Golf Club. By making the investment, Jemma receives a complimentary membership. Although the membership is not the primary investment, Jemma must comply with regulations made for the purpose of section 62A of the SIS Act in relation to the membership.

2.21 'Self managed superannuation fund' is defined in section 17A of the SIS Act.

2.22 Section 62A does not override section 62 of the SIS Act, which sets out the sole purpose test. Investments to which this measure applies need to comply with both section 62 and section 62A.

2.23 The rules that the regulations may prescribe can relate to the making, holding and realising an investment. In other words, the rules may be in relation to how the asset is acquired, stored and used while in the SMSF, and disposed of. [ Schedule 2, item 1, section 62A ]

2.24 The regulations may prescribe penalties for non-compliance with the rules set out in the regulations. The penalties cannot exceed 10 penalty units. This is consistent with paragraph 353(1)(d) of the SIS Act, which provides that the regulations may prescribe penalties not exceeding 10 penalty units in respect of offences against the regulations. [ Schedule 2, item 1, section 62A, note ]

2.25 Matters relating to offences against the rules will be set out in the regulations. Including the offence with the rules will ensure transparency and simplicity, and will assist with interpretation.

Minor amendment

2.26 Paragraph 353(1)(d) is amended to remove the reference to subsection 376(6). Subsection 376(6) was repealed on 24 September 2007 by item 55 of Schedule 1 to the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 . [ Schedule 2, item 2, paragraph 353(1 )( d )]

Application provisions

2.27 These amendments apply in relation to investments made by an SMSF before, on or after 1 July 2011. [ Schedule 2, item 3 ]

2.28 The regulations may specify that the amendments apply to only some of these investments. This will allow the five-year transitional period, announced by the Government as part of its election commitment, to be included in the regulations. [ Schedule 2, item 3 ]

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