Chapter 3
Investment in instalment warrants by
superannuation funds
Context of amendments
3.6 Regulation 13.14 of the Superannuation Industry (Supervision)
Regulations 1994 states that a trustee must not give a charge over, or in
relation to, an asset of the fund. This does not apply in relation to certain
charges specified in Regulation 13.15A, however these relate only to
options and futures contracts provided the superannuation fund meets
certain conditions.
3.7 Over a number of years instalment warrants have been marketed
to superannuation funds, particularly self-managed superannuation funds.
Instalment warrants are a derivative-based investment product, in that
they derive their value from the underlying asset. Traditionally, such
arrangements provide the investor with the right, but not the obligation, to
buy the underlying asset through the payment of instalments. Investors in
instalment warrants have a beneficial interest in the underlying asset,
subject to a security interest held by the issuer that secures the payment of
later instalments. Once the investor has made the first instalment they are
likely to be entitled to income from the underlying asset (eg, dividends
from shares).
3.8 The Commissioner of Taxation (Commissioner) (responsible for
regulating self-managed superannuation funds) and the Australian
Prudential Regulation Authority (APRA) (responsible for regulating other
superannuation funds) have come to the view that these arrangements
constitute a borrowing for the purposes of section 67 of the
Superannuation Industry (Supervision) Act 1993.
3.9 The Commissioner has also determined that an investment by a
self-managed superannuation fund in an instalment warrant is an in-house
asset of the fund under section 71 of the Superannuation Industry
(Supervision) Act 1993.
3.10 The Government has decided to legislate to legitimise
investment by superannuation funds in instalment warrants. The precise
scope of this measure has been determined following consultation with
industry. This Schedule gives effect to that decision.
3.11 Funds that invest in instalment warrants must continue to
comply with other legislative requirements. Furthermore, fund trustees
are still required to demonstrate the appropriateness of including
instalment warrants in their investment strategy.
Summary of new law
3.12 An exception to the prohibition on borrowing in section 67 of
the Superannuation Industry (Supervision) Act 1993 will allow a
superannuation fund trustee to borrow money in accordance with an
arrangement that has the following features:
• the borrowing is used to acquire an asset that is held on trust
so that the superannuation fund trustee receives a beneficial
interest and a right to acquire the legal ownership of the asset
(or any replacement) through the payment of instalments;
• the lender’s recourse against the superannuation fund trustee
in the event of default on the borrowing and related fees, or
the exercise of rights by the fund trustee, is limited to rights
relating to the asset; and
• the asset (or any replacement) must be one which the
superannuation fund trustee is permitted to acquire and hold
directly
.
3.13 In addition, the in-house assets rules are amended to provide that
an investment in a related trust forming part of an instalment warrant
arrangement which meets the requirements of the borrowing exception
will only be an in-house asset where the underlying asset would itself be
an in-house asset of the fund if it were held directly.
Comparison of key features of new law and current law
New law
Subsection 67(4A) of the
Superannuation Industry (Supervision)
Act 1993 will provide an exception to
the borrowing prohibition for
borrowings that meet certain conditions
commonly found in instalment warrant
arrangements.
Current law
Section 67 of the Superannuation
Industry (Supervision) Act 1993
prohibits superannuation fund
trustees from borrowing money
except in limited circumstances,
primarily related to short-term
liquidity.
New law
Subsections 71(8) and (9) of the
Superannuation Industry (Supervision)
Act 1993 will provide that an
investment in a related trust forming
part of an instalment warrant
arrangement which meets the
requirements of the borrowing
exception will only be an in-house
asset where the underlying asset would
itself be an in-house asset of the fund if
it were held directly.
Current Law
Section 71 of the Superannuation
Industry (Supervision) Act 1993
defines ‘in-house assets’ to include
an investment in a related trust of the
fund.
SMSF's allowed to borrow? Impact on property prices??
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Originally Posted by Julia
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