Today I am releasing an exposure draft of the Superannuation Legislation Amendment Bill (No.4) 1999, which gives effect to the new superannuation investment rules, for public comment and industry consultation prior to its introduction into Parliament.
I am also announcing a significant easing of the investment rules for small superannuation funds directly acquiring business real property from members or their relatives. In addition, the new investment rules will ensure that small superannuation funds can continue to directly lease business real property to members or an employer-sponsor.
In addition, I am announcing more generous transitional arrangements to assist superannuation funds which had particular investment arrangements in place before Budget night.
Extended Business Real Property Exception for Small Funds
At present, small superannuation funds are allowed to use up to 40 per cent of their assets to acquire business real property from a member. This is an exception to the general rule that prohibits a superannuation fund acquiring assets from members of the fund or their relatives. The 1998-99 Budget also announced that this exception would apply to business real property leased by a fund to members or the employer-sponsors.
The Government has decided to extend these exceptions from 40 per cent to 100 per cent. That is, a superannuation fund with fewer than 5 members will be able to invest up to 100 per cent of its assets in business premises that are leased to members or the employer-sponsor of the fund. This will enhance the ability of small business owners to use their superannuation savings to invest in their own business premises.
This decision recognises that land and buildings generally have an underlying value independent of the employer-sponsor’s business. Acquisitions of property and leasing arrangements will still need to be made on an arm’s length basis and the other requirements of the Superannuation Industry (Supervision) Act will also have to be met.
Further Transitional Arrangements
In addition to the arrangements already announced on 28 May 1998, I am announcing further transitional measures to assist superannuation funds which had particular investment arrangements in place before Budget night.
As a result of these changes and grandfathering arrangements already announced, the Government is:
- Grandfathering (ie, permanently exempting from the changes) all investments and loans made before 7.30 pm 12 May 1998 (Budget night). The grandfathering for loans continues until the loans are repaid.
- Grandfathering assets that were subject to a lease before 7.30 pm 12 May 1998. Grandfathering of a leased asset will continue while the same asset is leased to the same related party (ie effectively a lease on that asset can be rolled over, even if this is not provided for in the original agreement).
- Grandfathering all investments and loans made after 7.30 pm 12 May 1998 under legally binding contracts entered into before 7.30 pm 12 May 1998.
- Grandfathering assets subject to a lease after 7.30 pm 12 May 1998 under a legally binding lease entered into before 7.30 pm 12 May 1998 (while the asset continues to be leased to the same party).
- Grandfathering payments on partly paid shares and partly paid units where the shares or units were acquired before 7.30 pm 12 May 1998 or acquired under a pre-Budget contract.
- Exempting until 1 July 2001 any investments and loans made after Budget night but prior to the introduction of the legislation, and assets that became subject to a lease during this period
- where the investments, loans or assets were not otherwise covered by the exemption for pre-Budget legally binding contracts or leases.
In addition, a superannuation fund will be able to continue to reinvest earnings from a pre-Budget investment in the same associated entity (including reinvestment of earnings on earnings in the associated entity). This will allow the purchase of additional units in a unit trust, up to the amount of earnings reinvested. The ability of the fund to reinvest earnings in an associated entity will continue until 30 June 2005. Reinvestments up to that date would not need to be unwound, that is, they would be excluded from the definition of in-house asset.
Further details on the operation of the provisions are covered in the Attachment.
Draft Legislation and Consultation
Key industry and professional groups will be consulted on the legislation. The Government also welcomes written submissions from industry groups and individuals. A period of six weeks will be provided for written submissions to be received and where possible submissions should be made through industry and professional bodies.
A copy of the exposure draft of the Bill and an explanatory memorandum for the Bill can be accessed through the Internet at www.treasury.gov.au. Submissions should be addressed to The General Manager, Retirement and Personal Income Division, Department of Treasury, Parkes Place, Canberra 2600. The closing date for written submissions is 3 June 1999.
CANBERRA
22 April 1999
| Contact Officer: |
Matthew Guy Assistant Treasurer’s Office (02) 6277 7360 |
Geoff Painton Treasury (02) 6263 3205 |
ATTACHMENT
SUMMARY OF DRAFT LEGISLATION FOR NEW INVESTMENT RULES
In-house limits
Before the Budget announcement, the in-house investment limits applied to investments in, and loans to, an employer-sponsor and associates of an employer-sponsor. However, the provisions were not effective in covering trusts.
As a result of the Budget changes, the investment rules will now cover investments in, loans to, and assets leased to, an employer-sponsor or an associate or a member or an associate (that is, the related parties of the fund).
The definition of associate will cover entities that are majority owned or controlled by an employer-sponsor or a member (and associates). This includes a trust where an employer-sponsor or member is entitled to more than half of the income or capital of the trust, or the trustees can be expected to act in accordance with the directions of the employer-sponsor or the member, or the employer-sponsor or member can appoint or remove the trustee or a majority of the trustees.
The definition of associate also includes a partner in a partnership and a relative of a person.
For the purpose of the in-house provisions, the members of a self managed superannuation fund will be treated as associates of each other (as will any trustees or directors of a corporate trustee of a single member self managed fund).
The definition of an in-house asset will continue to exclude a deposit with a financial institution, and an investment in a pooled superannuation trust or in a life policy. In addition, an investment in a widely held unit trust will be excluded from the definition of in-house asset.
A widely held unit trust is a fixed trust which is not one where fewer than 20 entities hold entitlements to 75 per cent or more of the income or capital of the trust. (An entity and its associates will be treated as a single entity for this purpose).
As noted above, there will be an exemption where a superannuation fund with fewer than 5 members leases business real property to a related party. The definition of business real property is the same as under the existing legislation, that is, freehold or leasehold interest in real property used solely and exclusively in a business.
Transitional arrangements for in-house asset rules
The changes to the in-house investment rules apply from 7.30 pm 12 May 1998, subject to the transitional rules outlined in this Press Release and Press Release No. 25, 28 May 1998.
The following investments by a superannuation fund in a related party will be grandfathered (if not previously in-house assets):
- an investment that was made before 7.30 pm 12 May 1998;
- an investment that was made after 7.30 pm 12 May 1998, under a legally binding contract that was entered into before 7.30 pm 12 May 1998; or
- an investment that was covered by the exemption for reinvestments.
The reinvestment exemption applies if the superannuation fund made an investment in a company or a trust prior to 7.30 pm 12 May 1998. If the superannuation fund receives dividends or trust distributions from the entity after 7.30 pm 12 May 1998, that were derived from an investment made before 7.30 pm 12 May 1998, the superannuation fund can make a further investment into the same company or trust before 1 July 2005, that does not exceed the amount of these dividends or trust distributions.
The fund’s earnings on such reinvested amounts (and earnings on such earnings) can also be reinvested. Provided the reinvestments are made before 1 July 2005, the reinvestments will not be treated as in-house assets if they would not have been in-house assets prior to the changes (that is, they will remain excluded from the definition of in-house asset even after 1 July 2005).
In addition, an investment made during the transition period, between 7.30 pm 12 May 1998 and the date that the legislation is introduced into Parliament, will not be treated as in-house investment (if it would not previously have been an in-house asset) until 1 July 2001.
The following loans by a superannuation fund to a related party will be grandfathered (if the loan would not previously have been covered by the in-house rules):
- a loan that was made before 7.30 pm 12 May 1998.
- a loan made after 7.30 pm 12 May 1998 under a legally binding contract entered into before that time.
Otherwise, if a loan is made between 7.30 pm 12 May 1998 and the date of the introduction of the legislation, it will not be treated as an in-house asset because of the changes until 1 July 2001.
An asset leased by a superannuation fund to a related party will be grandfathered if the asset was leased to a related party before 7.30 pm 12 May 1998 and continues to be leased to the same related party. An asset leased by a superannuation fund to a related party will also be grandfathered if a legally enforceable lease was entered into before 7.30 pm 12 May 1998, and the lease came into force after that time. The grandfathering will continue while the asset is leased to the same related party through a continuous series of leases and lease arrangements.
Otherwise, if an asset is leased by a superannuation fund to a related party during the period between 7.30 pm 12 May 1998 and the introduction of the legislation, the asset will be exempt from the new provisions until 1 July 2001. Once again, the asset will need to be leased continuously to the same related party.
As outlined in this press release, business real property leased by a superannuation fund with fewer than 5 members will not be treated as an in-house asset. The business real property will need to be subject to a legally enforceable lease.
For payments on partly paid shares and partly paid units, the new rules will not apply if the share or the unit was acquired before 7.30 pm 12 May 1998 or acquired under a contract entered into before 7.30 pm 12 May 1998.
The other provisions of the SIS legislation, including the arm’s length requirement, will continue to apply to all fund transactions that are subject to the transitional rules.
Investments in Non-Associated Entities
In the 1998-99 Budget, it was announced that the in-house asset rules would be extended to cover investments in "non-associated" parties that invest directly or indirectly in the employer-sponsor or associates.
This will be achieved by modifying the existing anti-avoidance rule that applies where an agreement is entered into for the purpose of achieving the result of an in-house investment. Under the modified provision, an investment by a superannuation fund in an entity that is not a related party will be deemed to be an in-house asset if any of the parties are aware that the result would be an investment in, or a loan to or a lease with a related party.
The new provision will not apply to specified classes of investments, such as investments in widely held trusts.
This change will take effect from the introduction of the legislation into Parliament (except for contracts entered into before 7.30 pm 12 May 1998).
Restrictions on Acquisition of Assets
Currently, a superannuation fund is prohibited from acquiring assets from members or relatives (other than listed shares or, for superannuation funds with fewer than 5 members, up to 40 per cent of fund assets can be used to acquire business real property from members or relatives).
In the Budget, it was announced that this restriction will be extended. Accordingly, the prohibition on acquiring assets will be extended to all related parties (that is, employer-sponsors and their associates, and members and associates).
However, consistent with allowing a small superannuation fund to invest up to 100 per cent of its assets in business real property leased to a related party, the 40 per cent limit on acquisitions of business real property by superannuation funds with fewer than 5 members will also be increased to 100 per cent.
In addition, the prohibition on acquisition of assets will not apply to in-house assets that a fund is permitted to acquire under the in-house limits or to classes of assets that are specifically excluded from the definition of in-house assets (such as units in widely held trusts).
The increase in the 40 per cent limit to 100 per cent has effect from 7.30 pm 12 May 1998. The other changes to the acquisition of asset rules will take effect from the introduction of the legislation into Parliament (other than for contracts entered into before 7.30 pm 12 May 1998).