The ins and outs of DIY super funds.

Rules regarding membership, compliance and administration of self-managed superannuation funds (SMFs) are well on the way to being clarified.

The release of an exposure draft Bill this month should spark a lot of interest amongst financial advisers and other professional involved in setting up and managing SMFs.

The Bill deals primarily with the definition of SMFs; who regulates them; and

some of the rules which apply only to SMFs, including a new non-compliance test. A later Bill will deal with the proposed new investment rules.

Broadly, the Bill states that from 1 July 2000, regulated superannuation funds which qualify as SMFs will generally be regulated on prudential matters by the Australian Taxation Office (ATO).

Other funds will be regulated on prudential matters by the Australian Prudential Regulation Authority (APRA). The Australian Securities and Investments Commission (ASIC) will regulate all funds in relation to marketing, disclosure and related issues.

From July 2000, SMFs will pay a supervisory levy of no more than $200. They will also continue to be subject to SIS rules. The SIS rules already treat funds of less than five members differently from other funds in a number of respects. Most of these differences will be maintained for SMFs but not other funds with less than five members.

Under the new rules, SMFs will not be required to have an approved trustee (a trustee which satisfies rigorous capital backing and other tests imposed by APRA).

What is an SMF

To qualify as an SMF a fund will need to meet 3 tests.

Test 1 - It must have less than five members. The Bill defines member to include a person who receives a pension from the fund or who has deferred his or her benefit entitlement.

Test 2 - Generally, trustees must be members and vice versa The rules here vary depending on the number of members and the type of trustee. Broadly, the rules are illustrated in the table below.

If a member dies, the member's legal personal representative may act as trustee (or trustee director, as the case may be) in place of the member until death benefits commence to be payable.

In circumstances where a minor or another person with legal disability becomes a member the legal personal representative of the member can generally act as trustee or (or trustee director, as the case may be) in place of the member. A legal personal representative who has enduring power of attorney can also generally act in place of the member.

Test 3 - Members must be linked. Each fund member must be linked to each other fund member.

Two individuals are linked if they:

are both directors of the same company, trustees of the same trust, or partners of the same partnership and that entity carries on a business;

relatives;

both linked (under one of the first two dot points) to another individual.

One individual is a relative of another if he or she is a parent, child, grandparent, grandchild, sibling, aunt, uncle, great-aunt, great-uncle, niece, nephew, first cousin or second cousin of the other or the other's spouse. Alternatively an individual would qualify if they have such a relationship to the other or to the other's spouse because of adoption or remarriage. You can also be deemed related if a spouse of the other or a spouse of a person referred to in the first 2 dot points.

Time to reorganise

The regulations will be phased-in over the next two years. Broadly, funds with less than five members at 30 June 1999 will have until 31 March 2000 to reorganise their trusteeship and membership arrangements so as to become SMFs. Alternatively these funds need to ensure that they will meet all the SIS rules applying to non-SMFs. In either case, membership must stay below five during the transition period.

From April next year, it will be an offence (with serious penalties) for a person to act as trustee of a non-SMF fund with less than five members if they are not an approved trustee.

If membership or trusteeship of a fund changes at any time (other than by the addition of one or more new members), then a six month period is allowed to enable restructuring of the membership or trusteeship of the fund. That is, the fund will continue to be treated as an SMF for up to six months in these circumstances. This provision enables restructuring to occur, for example, in circumstances where members have divorced or dissolved a business association.

Annual returns - where to now?

For the 1998/99 year, trustees of all funds must lodge returns with APRA. For the 1999/2000 year, trustees of funds which are SMFs at the end of the year (or the last day of its existence if it wound up during the year) must lodge an annual return with the Australian Taxation Office (ATO). Trustees of all other funds must lodge a return with APRA.

After the year 2000/2001, trustees of funds which are SMFs at all times during the year (or until wind-up) must lodge returns with the ATO. Trustees of funds which are both SMFs and non-SMFs at different times during the year must lodge returns with both the ATO and APRA.

It is highly likely that ATO returns will combine Superannuation Industry Supervision (SIS) and income tax information requirements.

Non compliance test change

Currently, APRA has a discretion to make a fund non-complying if it breaches SIS, but the discretion is quite limited. Firstly, APRA must consider the tax consequences, the seriousness of the breach and all other relevant factors.

Secondly, either all members must be knowingly concerned in, or party to, the breach, or the innocent members must not suffer any substantial financial detriment if the fund is treated as non-complying.

Under the proposed legislation, the criteria for non-compliance will be somewhat different once a fund becomes a SMF. Specifically, the second test will not be relevant. In many cases, this difference will not be significant since the members are also trustees (or trustee directors) and if there is a breach one would expect all members to be knowingly involved in the breach in many cases. However, cases will no doubt arise where there are innocent members and the removal of the second test will cause an SMF to be non-complying where it would not be under current law.

Duty to notify

From July next year, if a fund becomes or ceases to be an SMF then the trustee must notify the ATO of this within 21 days. Contravention of this requirement will be an offence.

David Shirlow is associate director technical services at Macquarie Investment Management.

Individual Trustees Corporate Trustee

1 member funds the member must be one of the member must be:

2 linked* individual the sole director of the

trustees corporate trustee; or

one of 2 linked*

directors

2, 3 or 4 member funds all members must be all members must be

trustees PLUS trustee directors

all trustees must be all trustee directors

members must be members