New regulations covering the buying and selling of assets by SMSFs and related parties will apply from 1 July 2013. This is the federal government’s timetable, and it is likely to get parliamentary approval.
The thinking behind the legislation is quite clear: it is a response to the Cooper Review which found that the current provisions regulating related party acquisitions were insufficient to prevent SMSFs or related parties illegally benefiting from either transaction date or asset value manipulation.
To address these issues, the draft legislation will require that acquisitions and disposals of listed securities between related parties and SMSFs be conducted through an underlying market, and for the acquisition and disposal of unlisted securities to be supported by a valuation from a suitably qualified independent valuer.
A recent amendment to the draft will also enable related party assets to be acquired and disposed of without being conducted through an underlying market, or without a valuation from a suitably qualified independent valuer, if the asset is being acquired or disposed of solely as a result of a change to the trustees of the SMSF.
This amendment, if passed, will have the effect of allowing the off-market transfer of a listed security after 1 July 2013 if it is as a result of a change to the trustees of the SMSF (for example, a change from individual trustees to a corporate trustee or vice versa).
It is expected that these amendments will provide greater transparency to related party acquisitions and disposals, enabling SMSF-approved auditors and the Australian Taxation Office to monitor these transactions more effectively.
So how would the new rules work?
Section 66A of the Superannuation Industry (Supervision) Act 1993 (the ‘SIS Act’) will require the acquisition of a listed security from a related party of the fund to adhere to the new regulations. Similarly, section 66B will apply to the sale of a listed security.
Although regulations for sections 66A and 66B are yet to be released, it is expected that they will allow a “crossing order” – where a broker completes a trade and reports to the Australian Securities Exchange (ASX).
To accommodate on-market crossing, amendments will be made to the Corporations Act to ensure SMSF trustees who undertake an on-market cross do not breach the market manipulation provisions. Under the Corporations Act and the Australian Securities and Investments Commission’s (ASIC) Market Integrity Rules, an on-market crossing (commonly referred to as a “wash trade”) may otherwise constitute a serious offence.
SPAA has always argued against the banning of off-market transfers between related parties and SMSFs. In our view, there are other more cost-effective and equitable ways to address the issues raised by the Cooper Review panel.
For example, similar to the approach taken for collectables and personal use assets, the legislative controls around off-market transfers could be tightened by inserting a new SIS operating standard that would require off-market transfer forms to be submitted to the relevant registry in a set time.
It is worth remembering the general prohibition on acquiring assets from a related party applies to all types of assets other than a small list of exceptions listed in section 66 of the SIS Act.
The new legislation would require the market value of a non-listed asset acquired by an SMSF from a related party, or a non-listed SMSF asset sold to a related party, to be determined by a qualified independent valuer.
The legislation states that a valuer will be considered a “qualified valuer” either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgement by their particular professional community. This may be demonstrated by being a current member of a relevant professional body or trade association.
However, there will be situations where a qualified independent valuer does exist but the requirement to obtain a market valuation as determined by a qualified independent valuer provides little or no added benefit. Units held by an SMSF in a widely held unit trust are an example.
In a vast majority of cases the investment manager of the widely held unit trust will declare a regular unit price using valuations practices which comply with industry standards. Requiring the unit holder to obtain a market value for the units as determined by a qualified independent valuer in this scenario serves little purpose and will only result in unnecessary transaction costs being incurred by the SMSF.
To overcome these practical issues, in our submission to Treasury we said the explanatory material should be used to outline scenarios where the market value of an asset, which has been independently determined, would suffice as a market value determined by a qualified independent valuer.
To overcome issues with out-dated unit prices being used as the transfer value, and to uphold the integrity of these new provisions, it should be a requirement that the last declared price before the date of transfer is used.
At time of writing, Peter Burgess was technical director of the SMSF Professionals’ Association of Australia