B36/1992 MANAGED INVESTMENTS - UNLISTED PROPERTY TRUSTS

DATE OF ISSUE: 10 AUGUST 1992

MANAGED INVESTMENTS - UNLISTED PROPERTY TRUSTS

Purpose

The purpose of this instruction is twofold:

to advise staff of procedures for assessing service pension entitlements on investments held in unlisted property trusts where withdrawal or redemption has been "frozen" for 12 months, and

to outline the administrative arrangements following the Government's decision to ease the Income Test treatment applying to certain unlisted property trusts where they have been restructured before 23 July 1992.

Summary Of This Instruction

With effect from 23/7/91 withdrawals from unlisted property trusts may be delayed by the fund managers for a 12 month period after receipt of the withdrawal request.

Pre and post 9/9/88 investments continue to be assessed as usual subject to the following exception:

When DSS have approved a restructure for pension assessment purposes,

and

service pensioners holding pre 9/9/88 units are paid with units in a new property trust managed by the same fund manager,

the original units are not to be assessed for growth in the investment unit value, but

are assessed on an ongoing basis.

FROZEN WITHDRAWALS

Background

4 — Legislative Amendment No.200 of 1991 to the Corporations Act (Unlisted Property Trusts) has the effect of imposing a standard 12 month notice period for the withdrawal of funds from unlisted property trusts which were in existence as at 23 July 1991.

5 — The legislation also makes provision for early buy-back of units in cases of financial hardship.  It also incorporates a management company authority to determine a discount of up to 7.5%  that may be deducted from proceeds of early withdrawals.

Current Assessment under the Income Test - (VEA section 41 Module D refers)

6 — Unlisted property trusts provide assessable income to investors in two ways:

through cash income distributions to the investor, generally quarterly;  and

through capital growth in the value of the units or the issuing of bonus units.

7 — Income from unlisted property trusts is assessed under the market-linked investment rules:

If the investment was made before 9 September 1988 only the income distributions are assessable as income affecting pension entitlement during the life of the investment.  Capital growth that has accrued while the investor has been receiving a service pension is assessable when a withdrawal is made.

If the investment was made on or after 9 September 1988 then the income distributions and capital growth are assessed as income on an ongoing basis up to a maximum rate of 11% pa.  The actual rate is determined by the Secretary of the Department of Social Security under his "deeming" authority.

Continuing Assessment under the Income Test

8 — There is no change to the treatment of these units under the Income Test, unless the trust restructures (see para 12 onwards). Rules as set out in the above paragraph 7 for assessment of market-linked investments will continue to apply to unit holders in unlisted property trusts which do not restructure.

9 — Investors should not experience hardship because they will continue to receive income distributions and have the option to redeem units under the hardship arrangements with fund managers.

Assessment under the Assets Test - (VEA section 41 Module F refers)

10 — There is no change to the treatment of property trust units under the Assets Test.  Full asset value should continue to be maintained.

11 — Any service pensioner who is assessed as being in financial hardship due to the value of these units being included in their assessment, and is unable to redeem units under arrangements made with fund managers, will be able to apply for a pension under the VEA Asset Test hardship provisions.

SPECIFIC ASSESSMENT RULES APPLYING TO UNLISTED PROPERTY TRUSTS WHICH RESTRUCTURE BEFORE 23 JULY 1992

Background

12 — As previously noted, the 12 month notice period for the withdrawal of funds from unlisted property trusts is intended as a preliminary to restructure of the industry.  Some fund managers are proposing to restructure by terminating a number of trusts and paying out investors with units in new "merged" trusts.  The new trust will usually be listed for trading through Stock Exchanges.

13 — Under the VEA and Social Security Act such mergers would usually be treated as a realisation of the investment in the trust being terminated.  For investments made before 9 September 1988, this means that any capital growth in the terminated trust would normally be assessed as income for 12 months.  In addition income would be assessed on the new investment on an ongoing basis.

14 — As the above treatment of investment income could hamper restructuring of property trusts,   especially those with a large number of pensioner investors,   the Government has decided not to hold any capital growth on pre 9 September 1998 investments in the trusts to be terminated.  These rules apply only where unlisted property trusts are restructured before 23 July 1992 by paying out investors with units in another property trust.  Assessment of income from units in the new trusts will be on an ongoing basis only.

Summary

15For unlisted property trust that have restructured, the Government has removed the growth in value of units purchased prior to 9/9/88 from the assessment of pension.

Restructured Funds

16 — It is important to note that ALL decisions about the Income and Assets Test treatment of unlisted property trusts that restructure before 23 July 1992 will be made by the Secretary of the Department of Social Security.  Under no circumstances should DVA staff make these decisions or even advise a client of what they think the decision will be.

17 — DSS will look at each restructuring proposal submitted by fund managers and assess the proposals on an individual basis.  Once a decision has been made DVA staff will be advised through the Investment Policy Officer network.

18 — Clients eager to discuss this matter in any detail should be referred to the investment management company to enquire whether the company has applied to DSS for a review of the status of their proposed restructure.

Legislation

19 — Legislation has been introduced in the 1992 Autumn session of Parliament to enact these changes.

PETER HAWKER

NATIONAL PROGRAM DIRECTOR (BENEFITS)

30/6/92