Lawyer flags technical issue with dual fund strategies

Lawyer flags technical issue with dual fund strategies

With dual fund strategies attracting greater attention recently, an industry lawyer has flagged concerns around whether the transfer of assets between two SMSFs could result in potential breach of the SIS Act.

Cowell Clarke senior associate Nicole Santinon said following the recent super reforms, one of the strategies that has attracted attention involves a member with a total superannuation balance exceeding $1.6 million establishing a second SMSF.

“The idea is that the same member might have an accumulation SMSF and a pension SMSF, the assets funding the pension SMSF falling within the transfer balance cap,” Ms Santinon explained.

“There may be genuine commercial reasons for maintaining two funds, for instance, ease of accounting for pension and accumulation assets. One perceived tax advantage might be that the assets of the pension fund are higher yielding or expected to generate significant capital gains in the future, all of which will be tax-free,” she said.

However, she warned SMSF practitioners that there could be a potential technical issue with this strategy.

“The dual fund strategy involves the transfer of assets from one fund to another fund. One issue is whether such a transfer breaches S 66 of the Superannuation (Industry) Supervision Act 1993, she said.

“This investment standard prohibits a trustee from intentionally acquiring assets from a related party of the fund.”

Ms Santinon said a related party of a fund can include the trustee of a trust, where a fund member controls the trust. 

“Given that Part 8 of the SIS Act distinguishes between a trust and a superannuation fund, arguably the transferor fund would not be regarded as a trust, and therefore a related party, for these purposes,” she said.

“This is not entirely without doubt [however]. There are two specific exceptions to S 66 relevant to transfers between superannuation fund trustees. It might be said that if it were not possible for the trustees of superannuation funds to be related parties, these exceptions would not be required.”

In her view, the mere existence of these exceptions, she said, should not determine the interpretation of S 66.

“In our view, these exceptions might be construed as being only included in the legislation to avoid any doubt,” she said.

“The above interpretation is also consistent with the overall policy of S 66, namely to prevent bringing assets into the superannuation system through related party dealings. It is not to restrict the transfer of assets within the superannuation system.”

Ms Santinon also noted that the S 66 issue does not arise if the assets transferred are cash, business real property or listed securities acquired at market value. 

“The acquisition of these assets is exempt from S 66,” she said.

Lawyer flags technical issue with dual fund strategies
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