Assets transferred between SMSFs on marriage breakdown - application of transitional in-house asset rules.

Issue raised

The question raised for discussion at the NTLG Superannuation Sub-committee is whether:

  • the pre11August 1999 assets continue to be excluded from the measurement of the acquiring fund's in-house assets with retention of the original acquisition date, or
  • are now considered to be in-house assets on the transfer to the acquiring fund with an acquisition date as at the date of transfer. (Treasury)

On 28August the Tax Office issued SMSF (Assets Acquired on Marriage Breakdown) Determination 2006.

The Determination modifies the operation of section66 to allow SMSFs to acquire assets from a related party (another SMSF) as a result of the transfer out of a member from the other SMSF due to marriage breakdown. However, the transferred assets may include assets that were acquired by the original SMSF before 11August 1999 and excepted from being in-house assets only because of SubdivisionD of the in-house asset rules (the transitional rules).

The question raised above was forwarded to Treasury by a legal firm dealing in family law. The same question was forwarded separately to Treasury by a superannuation provider.

Treasury has now requested that the issue be raised discussion by the NTLG Superannuation Sub-committee.

Tax Office response

Section71A provides that an asset of a superannuation fund that is an investment made prior to the end of 11August 1999, or is a share or unit in a trust, acquired before the end of 11August 1999, will not be an in-house asset of the fund unless it would be an in-house asset under the law as it applied before the end of 11August 1999. The exemption also applies to assets acquired after the end of 11August 1999 under a contract entered into before that time.

The term 'acquire' has been taken to have a wide meaning in the context of subsection66(1): see paragraph42 in Lock v FCT per Goldberg J (2003) FCA 309. 'Acquire' encompasses any situation where the trustee of the fund becomes the legal or equitable owner of the asset. The term covers circumstances where a SMSF comes into possession of an asset by purchase, transfer or assignment, or by entering into a contract. SPR2006/MB1 applies to certain assets transferred or rolled over to an SMSF for the purposes of section66 that would otherwise result in a contravention of subsection66(1).

There is nothing to suggest that the meaning of 'acquired' in section71A will have a meaning that is inconsistent with 'acquire' in section66. It follows that any asset to which SPR2006/MB1 applies will have been 'acquired' by the 'acquiring fund' for the purposes of section71A at the time of rollover or transfer. If the asset to which SPR2006/MB1 applies was also an asset of the transferring fund to which section71A applies because it was acquired by the transferring fund before the end of 11August 1999, then section71A will not apply to the asset in the hands of the acquiring fund. The Tax Office is of the view that this result will equally apply to an asset transferred that was an 'investment made' by the transferring fund before the end of 11August 1999 (subparagraph71A(1)(a)(i)).

The circumstances in which an acquiring fund will be affected by this rule should be extremely rare. Thus, the Tax Office does not consider it necessary to make a Determination under paragraph71(1)(f) to effectively extend the in-house asset transitional rules. A particular fund that is affected by this issue may apply to the Commissioner for a Determination under paragraph71(1)(e) in relation to that fund. A decision would be made on the basis of the facts of the case. This advice should not be taken to infer that a Determination will be made in every case.

Several members (including the Taxation Institute of Australia (TIA), Small Independent Superannuation Funds Australia (SISFA) and National Tax and Accountants' Association (NTAA)) agreed that the benefit of the transitional provisions would be lost in what was probably only a small number of cases. However, the lost benefit could relate to a significant amount for the members of any particular fund. The Law Council suggested a class Determination should be made anyway.

Last modified: 15 Dec 2007QC 19585