BALDWINS • FoodLegal

Australian Lawyers and Consultants

Superannuation Laws Tighten on Self-Managed Superannuation Funds

July 1998 -- revised January 2000

From 1 July 1999, the Australian Taxation Office (ATO) officially becomes the sole regulator of self-managed superannuation funds (formerly known as "excluded funds") instead of the Australian Prudential and Regulation Authority (APRA), formerly known as the Insurance and Superannuation Commission (ISC). This follows the 1997 recommendation of the Wallis Committee to transfer the task of regulating excluded funds from the ISC to the ATO. The Federal Government has adopted this idea.

Self-managed superannuation funds are those with less than five members that qualify for exemption from various Superannuation Industry Supervision (SIS) rules, and are commonly referred to as "Mum and Dad funds" or "DIY super".

Under current law, the ATO does not impose tax penalties unless APRA has revoked the ‘complying’ status of a fund. APRA has had a track record of fair mindedness and has often allowed rectification pursuant to the APRA’s discretion under s 42 of the SIS (Superannuation Industry Supervision) Act. However, the ATO is more likely to attack self-managed funds that are involved in technical infringements. The editor of "Baldwins Bulletin" has described the ATO takeover as a possible case of "Dracula taking over a blood bank".

APRA has wide powers under ss 71(4) or 70A and ss 84-85 of the SIS Act in disallowing various forms of investment by superannuation funds.

In the May 1998 Federal Budget, the Federal Treasurer announced other changes restricting the operation of self-managed superannuation funds. These included a change to the definition of what constitutes a self-managed superannuation fund to ensure that all such funds are in fact self-managed. The proposed legislation either in Bill form or in Exposure Draft Bill form became publicly available in April 1999, and more changes are coming. Self-managed superannuation funds are being re-defined as superannuation funds with less than five members, where all members are trustees and there are no other trustees. Where there are two or more members, they must be either partners, directors or trustees of the employer-sponsor or their family relatives.

We are closely monitoring progress of the new investment rules that propose to give effect to the May 1998 Budget announcements on superannuation investments and "in-house assets" restrictions.

Superannuation Legislation Amendment Bill (No 3) ("SLAB 3") imposes requirements for members to be trustees (and related law changes) and received Royal Assent on 8 October 1999 as Act No 121 of 1999.

Superannuation Legislation Amendment Bill (No 4) ("SLAB 4") has also passed into law gaining Royal Assent on 23 December 1999 as Act No 1999 of 1999.

Exposure Draft (Superannuation Legislation Amendment Bill (No 4)) ("SLAB 4") broadens the "in-house asset" restrictions to investments with a "related party of the fund", which is a broader concept than the previous employer (and associate of employer) concept. A “related party of the fund” can include an associate (newly defined as a “Part 8 associate”) of a member or employer. Theoretically, the new definition has the potential to catch most geared unit trust arrangements. On the other hand, there are concessions in the proposed legislation, including:

1. grandfathering provisions that enable trustees of a fund to claim protection for investment arrangements predating 12 May 1998 (although some such arrangements could still be caught by the previous "in-house assets" restrictions if they infringe the pre-existing in-house assets restrictions);
2. exemptions for "business real property" acquired by a self managed fund, with fewer than five members, from either a member or other "related parties" (more lenient than the current Section 66 of the Superannuation Industry Supervision ACT 1993);
3. Small self-managed funds are to be expressly permitted to lease "business real property" to related entities at market value; and
4. the exemption for acquisition of listed securities from members is still to exist.

Clients will need to review existing superannuation structures and investments and should seek further advice on specific situations where there are concerns.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Superannuation Law Archive, Corporations Law Archive or Australian Tax Law Archive.