SMSFs and related party transactions – a guide to regulatory changes
The Federal Government will soon tighten regulations for related party transactions. Aaron Dunn lists some of the implications of this change.
The ability to off-market transfer shares to a self-managed super fund (SMSF) has been a popular strategy for many years for individuals to build their retirement savings.
The Cooper Review, however, concluded in its findings that a lack of transparency on such transfers resulted in some abuse to acquire these shares at market value.
Where the buyer and seller were one and the same, this provided scope to manipulate the level of contributions to be assessed against the caps, and also the individuals’ capital gains tax liability.
The recommendation, accepted by the Government, requires acquisitions and disposals of assets between related parties and SMSFs to be conducted through an underlying market where one exists, or where one does not exist, these acquisitions and disposals must be supported by a valuation from a suitably qualified independent valuer.
Proposed to take effect from 1 July 2012, this was deferred to 1 July 2013 to allow time for Government to consider a range of issues raised through industry consultation.
An exposure draft of regulations has now been released that will not only amend existing related party acquisition rules for SMSFs but also introduce new rules when disposing of assets to related parties.
Proposed new regulations related to SMSFs will insert a new section 66A into the SIS Act, applicable only to SMSFs, for trustees not to acquire certain assets from a related party of the fund.
Certain exceptions will apply, including listed shares, business real property, under a merger of regulated funds, and certain in-house assets.
Related party acquisitions
Listed shares
It appears that the Government may have left the door ajar to acquiring a listed security as long as it is acquired in a way prescribed by the regulations.
These regulations are yet to be released, but they will not prohibit trustees from acquiring listed securities from related parties, provided that the appropriate method, as prescribed in the regulations, is used.
Business real property
A trustee will be able to acquire Business Real Property (BRP) at market value as determined by an independent qualified valuer.
The valuer must hold either formal valuer qualifications or have specific knowledge, experience and judgement in their particular profession.
This can be demonstrated by membership of a current professional body or trade association. Independence of the valuer will not allow the individual to be a member or related party of the fund.
In-house assets
A trustee may acquire an asset from a related party if the acquisition of the asset constitutes an investment in certain in-house assets (those covered by subparagraph 66(2A)(a)), is at market value as determined by a qualified independent valuer and would not result in the level of in-house assets of the fund (within the meaning of Part 8) exceeding the level permitted by that Part.
For SMSFs, the only change from the existing subparagraph 66(2A)(a) is the requirement for a market value to be determined by an independent qualified valuer.
Related party disposals
The draft regulations will insert a new section 66B in the SIS Act that will prohibit the disposal of an asset to a related party, unless an exception applies.
These include listed securities, collectables and personal use assets, relationship breakdowns, money and other assets where the market value has been determined by an independent qualified valuer.
Listed shares
A trustee will be able to dispose of the listed security to a related party in a way as prescribed by the regulations.
These regulations will prescribe the way SMSFs may dispose of listed securities to related parties of the fund.
Collectables and personal use assets
Section 62A of the SIS Act outlines that the regulations prescribe how a fund may acquire, hold and dispose of collectable and personal use assets.
A trustee may dispose of such an asset prior to 1 July 2013, subject to the transfer meeting the requirements of sub-regulation 13.18AA(7) of the SIS Regulations.
Disposal of asset at market value by an independent qualified valuer
Where another exception in subsection 66B(3) does not apply, the trustee may dispose of an asset to a related party if the asset is disposed of at market value, as determined by a qualified independent valuer. This will include real property, both residential and commercial.
Penalties
A trustee who contravenes subsections 66A(2) or 66B(2) will be liable to an administrative penalty of 60 penalty units for each contravention ($10,200). MM
Aaron Dunn is the co-founder and managing director of The SMSF Academy.
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