By Graeme Colley 
Executive Manager, SMSF Technical & Private Wealth

Investments are the backbone of every superannuation fund as the income they earn, and the increase in their value, helps build a person’s retirement benefits to be paid as lump sums and pensions.  Therefore, it’s important for trustees to know what is required when acquiring or disposing of an asset - there are two sets of rules involved. Firstly, those involving arm’s length parties and related party investments.

Importance of the trust deed and investment strategy

The trust deed of a fund is important as it determines the categories of investments trustees are authorised to invest the fund’s money.  The deed may provide a very wide range of investments from traditional types such as bonds, shares, term deposits and real estate to those that are relatively new investments due to changes in technology.  Most trust deeds provide that if the trust law permits the investment then the fund can acquire it.  

No matter what the trust deed authorises the trustee to invest in, it’s the fund’s investment strategy which places a restrictive wall around the amount that the fund can invest in a particular investment category.  It’s the fund’s investment strategy that requires the trustees to consider investment risks, returns, diversification and the cash flow needed to pay any fund liabilities such as expenses and benefit payment.  All fund investments must be kept separate of any of the trustee’s personal assets.

Acquiring an investment from an arm’s length party

When acquiring an asset from an arm’s length party the superannuation rules require that it is on an arm’s length basis and the fund is not disadvantaged by the acquisition.  Generally, this requires that the investment is acquired at its market value which would usually be the case where it is acquired from an independent third party.  Also, the fund should have some type of proof of purchase such as a receipt of purchase or sale or a contract recognising the trustee, individual or company, as trustee for the superannuation fund.  

It is relatively easy to obtain proof of the change in ownership for listed shares and real estate.  This will be found in the fund’s online broking accounts or sharebroker accounts.  Where there is a change in the ownership of real estate a contract for sale or change in the registered title will provide sufficient evidence.  

However, some investments may not have formal registration processes like shares and real estate.  This may include private company shares, units in a private unit trust or investments such as most artworks and collectibles.  The company secretary of a private company or trustee of the unit trust may keep records concerning transactions involving changes in the ownership of units and the price at which the units or shares were purchased or sold.  The value of artworks and collectibles can usually be obtained from a valuer who has experience or is licensed to value particular artworks or collectibles.  Don’t forget the fund’s auditor will be interested to see purchase and sale documents of all investments especially unusual investments.  

In some cases, it may not be possible to have ownership of the investment recorded in the name of the trustee as trustee of the superannuation fund.  A declaration of trust may be necessary to show that an investment registered in the name of the trustee is held in trust for the superannuation fund.  This is usually the case for real estate investments and would occur at the time the property is settled.  Artworks and collectibles that are held in the names of the fund trustee would usually require a declaration of trust to ensure confusion cannot arise with those assets owned by an individual trustee in their personal capacity.  Where the trustees of the fund are individuals, investments such as listed shares may have a limit to the number of individuals who can be registered as owners or may only allocate a set number of spaces to record the trustee names.  In these cases it should be made clear in the fund records that the shares are owned by all the fund trustees and not just those named on the share register.

Example
The McCarthy Family Superannuation Fund consists of 4 members who are individual trustees of the fund.  The online share trading platform that they use will allow up to 3 names which have a total of 30 letters, including spaces.  However, the total number of letters of the trustees of the fund adds up to 67 letters.  The fund should retain records indicating the restrictions placed on the recording of the trustee’s names to provide evidence that it is not possible to have ownership of the shares recorded in all individual trustee’s names.  A corporate trustee may overcome this issue.

Acquisition of an investment from a related party

There is a general prohibition on an SMSF acquiring an asset from a related party but there are some exceptions to this rule.  That is, a fund can acquire listed shares or other securities listed on an approved stock exchange, business real estate including a farming property and in-house assets providing the acquisition is made at market value.  In-house assets include an investment, loans or leases of a fund asset to a related party.  A related party includes a fund member, a trustee or director of the fund’s corporate trustee, any relative or a unit trust or company that any of them control either individually or as a group.

Example
Corrine is a member of an SMSF and owns shares in an unlisted public company.  The shares are not listed on an approved stock exchange and therefore could not be acquired by her superannuation fund.  

Example
Peter owns a 40 hectare farm on which he runs alpaca for wool which is considered to be carrying on a farming business for tax purposes.  His SMSF has enough to purchase it for cash.  It is possible for Peter to sell his farm to his SMSF as it is considered to be business property and is permitted to be acquired by the fund under the superannuation legislation.

The lesson to be learned from a fund acquiring an investment whether it is from an arm’s length or a related party is to make sure it can be recognised as belonging to the superannuation fund and held in trust for the fund rather than in the trustee’s personal capacity.  Greater care needs to be taken if the acquisition by the fund is from a related party as there are strict limits on the types of investments that can be acquired.

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