Related Party Rules for SMSFs

From 1 July 2013, related party asset rules will be extended to cover disposals to related parties. Currently, the related party asset rules deal only with acquisitions from related parties and not disposals to related parties.  

These changes arose from a recommendation of the Super System Review.  The Review was concerned that the current rules lacked transparency and were open to manipulation in relation to the date of the transaction and to the value used as to the market value for the transaction.

The new rules are set out in an exposure draft of the legislation.  

The new rules restate the existing related party rules with the following changes:

•    Listed securities held by a related party will now have to be acquired in a way set out in the regulations (which are yet to be released); and

•    Business real property held by a related party must be acquired at its market value which must be determined by a qualified independent valuer.

Additionally, the rules will be extended to apply to disposals to related parties so that:

•    Listed securities held by the SMSF can only be disposed to a related party in a way set out in the regulations (which are yet to be released); and

•    Business real property held by the SMSF must only be disposed at its market value, which must be determined by a qualified independent valuer.

The other significant change of the exposure draft is to convert the current prohibition from an intentional offence to a strict liability penalty offence.  Under the current rules, a trustee breached the related party asset rule if it intentionally acquired an asset from a related party.  Such a breach was on offence punishable by imprisonment for a term not exceeding one year.  

From 1 July 2013, a breach will occur if the SMSF acquires (whether intentionally or unintentionally) an asset from a related party.  The penalty for such a breach will now be a civil penalty provision which will incur a penalty of 60 units ($10,200 at $170 per unit) or criminal prosecution.

Listed securities transactions

The main impact will relate to transactions relating to listed securities.  Currently, listed securities can be transferred to or from an SMSF by an off-market transfer.  From 1 July 2013, these transfers must be conducted in the manner to be prescribed by the SIS Regulations.  The materials released to date do not provide any details as to the required manner.  

If the manner is to be prescribed by the SIS Regulations, this may indicate that the Government has reconsidered its previous view that the transaction must be conducted by the related party selling the listed securities and the SMSF buying the same number of listed securities on market.  Possibly the Government will only specify a method which reduces the ability to select the date/market value which is to apply to the transaction – so that in specie transfers of listed securities can still be undertaken as long as the market value selection issue is removed.

Business real property transactions

The new rules will require that the evidence of market value for the transaction must be provided by a qualified independent valuer.  This requirement simply makes explicit the previous implicit requirement of market value and adds the rider that the valuation must be provided by an unrelated party.

A valuer will be qualified by holding formal valuation qualifications.  A valuer will be independent if they are not a related party of the fund (such as a member of the fund) and be impartial, unbiased and not be influenced or appear to be influenced by the parties to the transaction.

Presumably SMSF auditors will, as part of their auditing processes, require evidence that a formal written valuation was obtained prior to each transaction from an appropriately qualified and independent person and that the transaction value was consistent with the valuation.

Apart from the qualified independent valuer requirement, the new rules will not adversely affect Business Real Property transactions – whether by way of purchase (whether geared or ungeared) or by way of contribution.

Collectables Transactions

Currently SMSFs are permitted to invest in collectables and personal use assets (collectively “Collectables”) but certain strict rules apply.  For grandfathered Collectables (ie held by the fund on 30 June 2011), these rules will not apply until 1 July 2016.  For new Collectables (ie acquired on or after 1 July 2011) these rules apply from the date of acquisition.

The rules deal with, amongst other things, leasing of Collectables to related parties (not permitted); storage of Collectables in private residence of related party (not permitted); the use of Collectables by related parties (not permitted) and disposal of Collectables to related parties (only permitted at market value supported by qualified independent valuer).

From 1 July 2013, the new SMSF acquisition and disposal rules will apply to Collectables.  In particular, Collectables will only be acquirable from a related party at market valuation supported by a qualified independent valuer.  

While there is currently a rule requiring disposals of Collectables to related parties to be at market value as supported by a qualified independent valuer – SIS Reg 13.18AA(7). This rule applies to new Collectables and only applies to grandfathered Collectables from 1 July 2016.   The effect of the grandfathering will be preserved.  Consequently, for grandfathered Collectables, new s66B will only apply from 1 July 2016.  

Related party asset acquisitions and disposals – relationship breakdown

The current exception to the acquisition rule relating to acquisitions of related party assets arising from or connected with relationship breakdowns will be preserved under the new s66B.  Consequently, an SMSF could acquire an asset from a related party (eg related SMSF) even if the asset is not listed as securities or business real property.

Equally, the relationship breakdown exception will apply to the disposal rule. However, in each situation, the acquisition or disposal must be at market value supported by a qualified independent auditor.

In-House assets

The 5% in-house asset exception which currently applies will be continued under the new section, subject to one additional condition.  The current exception applies if the acquisition is at market value.  The additional condition is that market value must be determined by a qualified independent valuer.

There is no in-house asset exception to the disposal rule.

Who is a qualified independent valuer?

This term is not defined in the exposure draft.  The supporting materials to the exposure draft state that a valuer will be qualified either by formal valuation qualifications or by being considered to have specific knowledge and judgment by their professional community.  The former may be demonstrated by membership of a relevant professional association or body.

A valuer will be independent when the valuer is not a member of the fund involved in the acquisition and is not a related party of a member of the fund.  Additionally, the valuer, to be independent, must be impartial, unbiased and not be influenced by, or appear to be influenced by, others.

Anti-avoidance provision

New s66C will reproduce the current anti-avoidance provision set out in s66(3) and will apply to schemes attempting to circumvent the new acquisition and disposal rules.

Civil penalty provision

New sections 66A, 66B and s66C will be made civil penalty provisions.

Legislative changes

The current definition of “business real property” will be relocated from s66(5) to new s21(1).  The “primary production business” modification will be relocated from s66(6) to new s21(3).  No material changes have been made to either definition.

Section 66 (which currently imposes the related party asset acquisition rules) will be restricted to APRA regulated funds.  New sections 66A (dealing with acquisitions from related parties) and s66B (dealing with disposals to related parties) will set out related party asset rules as they apply to self managed superannuation funds.

Section 62A (collectables and personal use assets) will apply subject to the new sections 66A and 66B.