Attwood Marshall Lawyers Property & Commercial Partner Barry van Heerden discusses the legislation governing Self-Managed Super Funds in Part 1 of the Self-Managed Super Fund series. In Part 2, we learn about borrowing by Self-Managed Super Funds.
In recent times we have noted a substantial increase in parties buying property in their self-managed super funds (“SMSF”).
SMSF’s are strictly regulated and non-compliance with the rules may have disastrous consequences. The Commissioner has a range of options available where there is non-compliance, some of which are the following:-
- Making the fund a non-complying fund;
- Disqualifying individual trustees and prohibiting them from acting as trustee of a super fund;
- Suspending or removing the trustees;
- As part of an investigation, freezing the assets of the fund;
- Seeking civil and/or criminal penalties through the courts.
In this part 1 of a 2 part series we will attempt to highlight some important restrictions relating to SMSF’s and specifically investments in and by the SMSF. In part 2 we will provide more details relevant to the purchase of properties in the name of a SMSF and the borrowing of funds to do that.
The Superannuation Industry (Supervision) Act 1993 (“SIS Act”) contains a number of restrictions:-
- A restriction against lending money to members of the fund or relatives of members or giving other financial assistance using the resources of the fund to members or relatives; (section 65)
- A restriction against acquisition of assets from a related party; (section 66)
- A restriction against borrowing except for limited purposes; (section 67)
- A restriction against investing in or holding in-house assets above prescribed percentages
(Please note the above is not an exhaustive list).
The phrase “related party” is defined in the Act as meaning any of the following:-
(a) a member of the fund;
(b) a standard employer sponsor of the fund;
(c) an associate of the persons referred to in (a) and (b) above.
As mentioned above, Section 65 of the SIS Act contains a restriction against lending money to members of the fund or relatives of members of the fund or giving other financial assistance using the resources of the fund to members or relatives.
The definition of “relative” is:-
(a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse;
(b) a spouse of the individual of any other individual referred to in paragraph (a) above.
A “loan” includes the provision of credit or any other form of financial accommodation and “financial assistance” will apply if the SMSF give any financial assistance using the resources of the fund to a member or relative of a member.
There has been some debate regarding the meaning of the word “assistance”. The courts have considered the meaning of this word with the phrase “financial assistance” and has stated:-
“Financial assistance must be something wanted or needed by a person”.
Another important restriction is the restriction against acquisition of assets from a related party which are dealt with in Section 66 of the SIS Act. The section states basically that a trustee of a SMSF must not intentionally acquire an asset from a related party of the fund.
There are some exceptions to this restriction, mainly relating to acquisitions of business real property, listed securities and certain in-house assets. The meaning of in-house asset is set out in Section 71 of the Act, is very wide but also excludes a range of particular assets.
Section 67 of the SIS Act contains a provision against borrowing except for very limited purposes. Again, there are exceptions available and Section 67A refers to “limited recourse borrowing arrangements”. This exception basically states the money borrowed has been applied for the acquisition of a single acquirable asset, the acquirable asset is held on trust, the SMSF has a right to acquire legal ownership at some point of time and the rights of the lender against the SMSF trustee are limited to rights relating to the acquirable asset.
Section 67 as very broadly outlined above is the section under which parties buy property in their SMSF.
We discuss the details of these borrowings and the way a contract must be drafted in part 2.