Superannuation

If two business partners commit money from their DIY super funds to a unit trust that invests in plant and equipment that it then leases to the business at commercial rates, they need to be aware of the related party and in-house asset rules.

In the usual circumstance where the partners’ respective DIY funds are deemed to be related to each other by the super law, if either or both super funds together own more than 50 per cent of the units in the unit trust or control the decisions of the trustee of the unit trust or have the power to remove that trustee, the trust will be a “related trust” under the super legislation.

In-house assets

This will result in the investment by each of the super funds being classified as an “in-house asset”, which means each fund is only allowed to acquire units equal in value to no more than 5 per cent of the value of all the assets of the relevant super fund.

Once the two funds between them hold 51 per cent or more of the units in the trust – say the whole 100 per cent – the trust becomes “related”.

This means the investment in the trust becomes an “in-house asset” for each fund and is subject to the 5 per cent limit placed on in-house assets.

The 5pc rule

At that point each DIY fund could only hold its investment in the trust if the units are worth no more than 5 per cent of the value of all of the assets of the relevant fund (assuming each fund has no other in-house assets).

In fact it is possible for one fund to own more than 50 per cent of the units and still satisfy the rules.

For example, if the trust owned assets of $200,000 and Fund A initially acquired 60 per cent of the trust units valued at $120,000 and the fund has total assets of $3 million, the investment would be permissible by the DIY fund. That’s because the investment in the trust would amount to only 4 per cent of the fund assets and therefore would not breach the 5 per cent in-house assets limit.

If Fund B planned to acquire the remaining 40 per cent of the trust units of the trust which are valued at $80,000 but Fund B’s total assets are valued at only $1 million, it could only acquire a maximum of $50,000 of units because this would equal 5 per cent of the value of the fund’s total assets.

The remaining $30,000 of units in the trust would need to be acquired by another party.

Non-stop vigilance

In this example, you need to be alert to the risk of inadvertently exceeding the 5 per cent in-house asset limit, which could happen if the total assets of either fund declines or the value of the trust assets rise proportionally. It’s a constant monitoring job.

Where a fund does exceed its in-house asset limit, the trustees are required under super law to prepare and carry out a written plan that details how they will dispose of excess units above the 5 per cent in-house asset limit by the end of the next income year.

Given there are a number of anti-avoidance rules in super law which can apply to in-house asset investments, it is wise to have this strategy checked by an expert.