How, legally, Old Mutual International bonds can be a suitable investment within an Australian Superannuation Fund for a policyholder who returns or moves to Australia.
If a policyholder has taken out a Old Mutual International Bond whilst outside of Australia and then either moves to Australia or returns to live there, it may well be possible for the Bond to be transferred into an Australian Superannuation Fund providing certain requirements are met. The justification for this is laid out below.
The rules governing Australian Superannuation Funds (‘the Fund’) are contained in the Superannuation Industry (Supervision) Act 1993 (‘SISA’) and the Superannuation Industry (Supervision) Regulations 1994 (‘SISR’).
The Fund is simply a type of trust, similar to a pension trust in the UK and therefore general trust law also applies.
If the Fund is regulated under SISA then ‘the supervised funds and trusts may become eligible for concessional taxation treatment’ (SISA s3(2)).
The Fund will only be regulated by SISA and in turn receive beneficial tax treatment if the requirements set out by SISA are met. Some examples of these requirements are:
- SISA Section 52 – the covenants
There are a number of covenants that the trustees of the Fund must comply with. These include acting honestly in all matters concerning the Fund, keeping the money and assets from the Fund separate from any other money and assets and ensuring that the trustee’s duties and powers are performed in the best interests of the beneficiaries.
The key covenant here is to formulate an investment strategy. The trustees of the Fund would have to ensure that they have formulated an investment strategy and ensure that transferring the Bond into the Fund would have to be in line with it. The trustees would, however, have to be mindful of all of the covenants under this section.
- SISA Section 62 – sole purpose test
The trustees of the Fund must only make an investment for the ‘right purposes’ i.e. it must be the correct structure to invest in. In this context it means to provide benefits for each member of the Fund upon retirement.
Therefore providing the trustees consider the Bond is an efficient structure to effectively access the underlying assets, then a transfer of the Bond into the Fund will meet the sole purpose test.
Under section 83 SISA there are strict limits on the ability of a trustee to acquire assets that are ‘in-house’ assets. Section 71 (1) of SISA states that an investment will be an ‘in-house’ asset if: it is a loan, an investment in a related party, an investment in a trust or a lease.
Since the investment in the Bond is the contractual right to have Old Mutual International pay money pursuant to certain terms, none of the conditions are relevant. The Bond is therefore not an in-house asset and the rules do not apply.
Trustees must comply with general trust law and therefore, as required within this, they must ensure that they comply with the trust instrument. This means that the Fund would have a trust deed which must be reviewed to ensure that investing in the Bond is permitted.
Australian Superannuation Fund
In order to receive the concessional tax treatment under SISA, the Fund must be a ‘complying Superannuation Fund’. This means that, amongst other things, it must be a resident regulated Superannuation Fund within the meaning of the Income Tax Assessment Act 1997 (ITTA 1997).
Providing the Fund is regarded as a complying superannuation fund and the trustees have an investment strategy which permits the Bond as a suitable asset, then it will be acceptable to hold a Bond within an Australian Superannuation Fund.