In-House Asset Reviews for Super Funds
September 2002
The use of an interposed unit trust allowed many a self-managed superannuation fund to invest in a geared real estate investment whilst circumventing the prohibition on superannuation fund borrowings. However, from after 11 August 1999, the new “Part 8 Associate rules” and the amended “In-house asset rules” took effect. These rules prevented a self-managed superannuation fund from holding more than 5% of fund assets (measured by market values) in associated entity assets with few exceptions.
Any breach of these rules would result in the fund becoming non-complying and liable to hefty tax liabilities at the top marginal income tax rate applied to the value of the fund assets (excluding the value of the Undeducted Contributions component). In other words, almost half of the assets of the non-complying fund might become liable to confiscation by the Tax Office!
However, the new rules permitted a number of “transitional arrangements” so that some superannuation funds could maintain the status quo for some such investments.
Nevertheless, for some superannuation funds, the unit trust investment structure may have outlived its usefulness or created its own problems. For example, the ATO does not like arrangements in which fund members live on the property - having regard to the existence of the “sole purpose” test. Moreover, the “main residence” tax exemptions for CGT and land tax are not available for such circumstances. Very substantial capital growth has also created additional income tax problems for some.
Baldwins can provide professional advice and appropriate solutions to these problems covering the many different factual circumstances that may apply.
For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.
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