Penalties for non-compliance with the super legislation are to be reduced but they are likely to be easier to impose. In addition the administration of these funds will pass to the Australian Tax Office in July next year, a move that is expected to mean a less forgiving regime than the current one administered by the Insurance and Superannuation Commission. The most important change however is to the investment rules governing small funds. The changes are designed to stop a number of widespread strategies that use trusts and other similar entities in conjunction with a super fund. Notably the new rules will stop trusts being used to circumvent the borrowing prohibition imposed on super funds.
Some funds invest in a trust that in turn borrows to buy an asset.
Funds with these arrangements in place will have until July 2001 to unwind them. This could be an extremely expensive proposition. Many funds will be forced to pay extra stamp duty, capital gains tax and other costs that will have the effect of reducing retirement savings. The injustice of the proposals is that up until budget night many of these transactions were specifically sanctioned by the Insurance and Superannuation Commission in a circular to the industry in 1994. Because of the limited time involved to unwind the structures some analysts are predicting that prices will plummet as a glut of property comes onto the market.