Super investment rules changes unveiled

At the end of April, the Assistant Treasurer released an exposure draft of the Superannuation Legislation Amendment Bill (No. 4) 1999. This is the legislation that implements the investment rules changes for superannuation funds announced in the 1998 Federal Budget.

Comments on this draft can be made until June 3, after which the Government will introduce it into Parliament. Even though it's a draft of undebated legislation, we now have an idea of the Government's intended approach. This artic

At the end of April, the Assistant Treasurer released an exposure draft of the Superannuation Legislation Amendment Bill (No. 4) 1999. This is the legislation that implements the investment rules changes for superannuation funds announced in the 1998 Federal Budget.

Comments on this draft can be made until June 3, after which the Government will introduce it into Parliament. Even though it's a draft of undebated legislation, we now have an idea of the Government's intended approach. This article summarises the current draft bill, but be prepared for changes in the final detail.

In-house asset rules changes

The draft bill changes the in-house asset rules in the Superannuation Industry (Supervision) Act, 1993 (SIS Act), bringing more assets under the in-house asset definition. The definition has been expanded to include investments in, or leases or loans to, a related party. A related party is a member of the fund; a standard employer sponsor of the fund; or an associate of these.

The current definition of an "in-house asset" is loans to, or investments in, a standard employer sponsor or an associate of the employer sponsor by a super fund. By 2000-2001, the market value of in-house assets is to be brought down from the current limit of 10 per cent of the market value of the fund to 5 per cent. The total value of new and existing in-house assets can't exceed the current 5 per cent limit.

What's an associate?

The bill also gives rules for associates of individuals, trusts and companies. An associate of a member or standard employer sponsor is broadly defined. I'll use an example where the member, or standard employer sponsor, is an individual. An associate of an individual includes: a relative (broadly defined); business partner (or their spouse or child); any other member of the fund (if it is a self-managed fund); any trust the individual controls; any company where the individual holds sufficient influence or majority votes.

Exemptions

The draft bill adds two exemptions to the definition of in-house assets (without affecting any of the existing exemptions, such as life policies, investments in PSTs on arms' length terms or bank deposits).

Firstly, for self-managed funds, business real property leased to a related party isn't counted as an in-house asset. The fund can hold up to 100 per cent in business real property leased to a related party, provided the other SIS Act requirements are satisfied.

Business real property has the same definition as used in the acquisition of assets from related parties rules (basically real estate used exclusively in a business).

Secondly, widely held unit trusts are exempted.

Two common strategies affected

The following two examples show the legislation's effect. Until now, many self-managed funds have leased equipment used in a client's business to the business. For example, a mechanic's self-managed fund might buy a car hoist and lease it to his business company. Because the mechanic owns the company and is also a member of the fund, the company is an associate of the member and a related party. Therefore, leasing the hoist creates an in-house asset - breaching the 5 per cent rule.

Secondly, many super funds have used unit trusts to gear assets. For example, a client may want his self-managed fund to purchase an $180,000 investment unit. A common strategy has been for the fund to invest a proportion, say $60,000, in a private unit trust with the trust borrowing the remaining funds to buy the unit. If the client is a member of the fund and controls the trust, the trust is a related party and the investment in the trust becomes an in-house asset.

Other changes

The bill also bans a super fund from acquiring assets from a related party rather than just a member or relative. But it also lifts the 40 per cent business real property exception to 100 per cent.

Start date

These rules will affect arrangements made after the time of the introduction of the legislation (assuming, of course, the legislation eventually gets passed). Any arrangements made between 12 May, 1998 and the time of introduction will have to be unwound by 1 July, 2001.

Given the closing dates for submission is early June, the earliest the legislation could be introduced to parliament is the middle of June. So keep an eye out for the finalised legislation.

Nick Ingram is the head of distribution development at Westpac Financial Services.