Good old Australian Prudential Regulatory Authority (APRA) continues to regulate all other super funds.

What is the L-A-W at the moment?

The Superannuation Legislation Amendment Bill (No 3) 1999 was introduced into Parliament on 31 March 1999 but has not seen the light of day yet.

• 4 or less members;

• All members must be trustees (or directors of a corporate trustee);

• All trustees (or directors of a corporate trustee) must be members;

(But members do not have to be shareholders of a corporate trustee)

• Each member must be "linked" to each of the other members;

• Trustees cannot be paid for services or duties performed.

‘Linked’ Members

Generally, members will be ‘linked’ if they are relatives (including former spouses) or if they carry on a business together (or carried on a business together immediately before retiring) as co-directors, co-trustees or partners.

Legal Personal Representative as Trustee

Generally, a legal personal representative can act as trustee for the member where:

• a member is under a legal disability;
• the legal personal representative has an enduring power of attorney; or
• in the event of the member’s death (prior to payment of the death benefits).

A parent or guardian can also act as trustee for a child.

• there are 2 trustees - the member and someone else "linked" to the member (who can be a "dormant" member);

• there is a corporate trustee with the member as the sole director; or

• there is a corporate trustee with two directors - the member and someone else linked to the member.

Is your SMSF too crowded?

What happens if a fund ‘automatically’ qualify as a SMSF from 1 July 1999?

Many funds will be structured in a way that means they already meet the new definition and intend to retain that structure. These funds will be subject to ATO regulation from 1 July 1999 (since the Bill has not been passed, it will be from the date of Royal Assent).

However, there will be funds that meet the definition of SMSF at 1 July 1999 but which restructure during the transitional period (i.e. before 31 March 2000). For practical purposes, these funds remain regulated by APRA.

Existing Funds have until 31 March 2000 to qualify as a SMSF

Funds that do not qualify as a SMSF but wish to do so, will be subject to APRA regulation until such time as they re-arrange their structure.

During this transitional period a former excluded fund (which does not meet the new definition of a SMSF) need only comply with the SIS requirements applying to SMSF’s (rather than the full SIS requirements applying to larger funds).

New funds with fewer than 5 members established after 1 July 1999 must qualify immediately

Funds with fewer than 5 members established after 1 July 1999 or the date of Royal Assent to the legislation (whichever is the later) must meet the definition of a SMSF from inception.

What happens if a fund with fewer than 5 members do not qualify as a SMSF by 31 March 2000?

After 31 March 2000 any fund with fewer than 5 members which has not qualified as a SMSF will be regulated by APRA (which means tougher rules).

They will need to have an "approved trustee" - an independent corporate trustee that has met the capital, solvency and other requirements.

A list of approved trustees is now available on the APRA website @ www.apra.gov.au.

APRA will have the ability to remove the fund trustee if they are in fact not an approved trustee.

If you are not an approved trustee, you could go to gaol for 6 months!

• who are the trustees (corporate or individual) and who are the members?

• are all members of the Fund also directors of a corporate trustee?

• are there external directors of the corporate trustee who are not members of the Fund?

• do you have members who are children or who are under a legal disability?
• is your independent corporate trustee an approved trustee?

Will amendments to a fund's trust deed be required?

Possibly. Amendments to the trust deed may be required in some cases, for example:

a fund is to become a SMSF and its existing trust deed or governing rules require a third party to be trustee - in this case amendments would be required to the provisions relating who may be appointed trustee;

the fund is not to become a SMSF which means that the current trustee(s) resign and an approved trustee is appointed so the fund is regulated by APRA - in this case the provisions relating to appointment and removal of a trustee may require amendment.

Any change to the trustee structure should be consistent with the fund's election to be regulated, otherwise further changes would be required.

For example, an election may have been made with a corporation as trustee and the primary benefit under the deed is payable as a lump sum. In this case, a change to individuals as trustees would require that benefits be paid in the form of a pension.

The changes to the provisions in the governing rules relating to the form of benefit would have to be made at the same time as those for the trustee structure or earlier (so there is no 'gap' that would render the election invalid).

APRA to issue notice to find out status of Funds

It is intended that APRA will issue notices to all funds in approximately March 2000 to determine the status of the fund.

The notice will ask questions about the structure of the fund, to determine that it is an SMSF and trustees will be required to respond within a specified period, probably 21 days.

What happens to your election to be a regulated super fund?

Currently, under the SIS Act, a newly established fund must "elect" to be regulated by notifying APRA accordingly.

Despite the ATO taking over SMSF regulation from 1 July 1999, the ATO will not take over the function of accepting these election notices (for SMSF’s or any other funds) until later in the 1999 calendar year (the exact date has not yet been determined).

Do funds with fewer than 5 members lodge their 1998/99 year SIS return with APRA or the ATO?

APRA.

All funds which had fewer than 5 members at 30 June 1999 (including funds which later became SMSF’s) will be required to lodge their 1998/99 annual return under SIS with APRA. This return will be due by 31 March 2000.

This is worse than the SMSF amendments above.

An Exposure Draft Superannuation Legislation Amendment Act (No 4) 1999 were released on 22 April 1999 and submissions were due by 3 June 1999. No sign of the Bill yet.

The In-House Asset Rules

Super Funds can only hold 5% of the market of value of the fund as in-house assets.

The in-house asset rules stops the Fund:

lending money or providing financial assistance to a member, a relative of a member, and related parties.

buying certain assets from a member and related parties.

Range of in-house assets broadened

The related party definition is now broader and includes associates that are partners and entities that are controlled by an employer-sponsor or a member.

In-house assets now include investments, loans, and lease arrangements between a Super Fund and a related party.

However, an investment in a widely held unit trust (a fixed trust where > 20 members hold > 75% entitlement to income or capital) is not an in-house asset.

"Bonus" for business real property investments?

At present, small super funds are allowed to use up to 40% of their assets to buy business real property from members. This is an exception to the general rule against a super fund buying assets from members or their relatives.

The good news is that the Government is proposing to allow SMSF’s to invest up to 100% of its assets in business real property (freehold or leasehold interest in real property used solely and exclusively in a business).

Transitional Rules

The following assets will be grandfathered (permanently exempted from the changes):