As noted in part 1 of our articles on the application of the Bendel decision to the Superannuation Industry (Supervision) Act 1993 (SIS Act), in our view, it is likely that the Courts will apply the Bendel decision to the SIS Act, such that the expanded definition of loan in the SIS Act will apply to arrangements that involve the advancement of principal with an obligation to repay and that it will not apply to a mere creditor and debtor arrangement (like a UPE).
In this part 3 of the series we examine how this may play out in the in-house asset rules contained in Part 8 of the SIS Act.
Section 71 – in-house asset rules
Section 71(1) of the SIS Act provides that loans to related parties and investments in related parties and related trusts are in-house assets. Part 8 of the SIS Act prohibits self managed superannuation funds (SMSFs) from holding more than 5% of their assets as in-house assets.
In-house asset loans
Subsection 10(1) defines the term 'loan' as follows:
loan includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings.
In SMSFR 2009/4, the Commissioner takes an expansive view of this extended definition as outlined in paragraph 11:
11. This definition is inclusive and expands the meaning of the term substantially beyond the traditional meaning of a 'loan' which involves a payment and repayment of an amount of money. The definition of the term 'loan' in subsection 10(1) extends the scope of arrangements covered to include arrangements that are in substance financing arrangements deferring the payment of an amount. Such arrangements would include but are not limited to:
the lending of money;
the sale of goods or land on credit;
instalment payment arrangements; and
arrangements for the deferral of payment of debts or entitlements.
However, the Bendel decision casts great doubt on the Commissioner’s view. In our view, the reasoning applied in Bendel limits this expansive interpretation of loans for the purposes of the in-house asset rules. That is, the provision of credit and financial accommodation in the expanded definition of loan should be limited to arrangements where there is an advancement of principal with an obligation to repay.
In-house asset investments
The Commissioner also has an expanded view of an investment in a related trust or related party for the purposes of what constitutes an in-house asset under section 71(1) of the SIS Act.
‘Investment’ is not defined under the SIS Act. Instead, the Commissioner refers to the definition of ‘invest’ under section 10(1) of the SIS Act, where ‘invest’ means:
apply assets in any way; or
make a contract;
for the purpose of gaining interest, income, profit or gain.
In the Commissioner’s view this can extend to the advancement of money or assets, as outlined in paragraph 18 of SMSFR 2009/4:
18. It is the Commissioner's view that where money or assets are provided for the benefit of a related party or related trust for the purpose of receiving income, interest, profit or gain, a sufficiently close connection will be established between the investment and that entity to enable it to be described as an investment 'in' that entity. It is the reliance on the related party or the related trust for payment on the investment which will be determinative, as this is what gives rise to the financial risk that the rules in Part 8 are designed to reduce.
Again, in our view, this expanded definition is not supported by the statutory construction principles applied in Bendel. The definition of ‘invest’ under section 10(1) of the SIS Act requires there to be an investment like activity. An investment in a trust or a company results in the investor being entitled to rights to income, capital and/or dividends (typically in proportion to units or shares held). The mere advancement of assets or money to a company or trust does not result in such an investment.
Therefore, in our view, this expanded definition of invest must be read in the statutory context of an arrangement involving an investment or investment like arrangement.
For further information please contact:
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au