Superannuation funds allowed to borrow!

[yonnie]

hi folks,

just read today in the newspaper that the rules have been amended to allow SMSF to borrow in certain limited circumstances.

apart from that your trust deed must also allow you to do that.

anybody know what those limited circumstances are?

[theasxgorilla]

It would not surprise me if this is a move to get some of the money trapped in super back into the investment property market to address the rental stock shortage issue. The lib's are so clever, and what great timing too, world equity markets are about to go belly up and we have 40 people turning up to every rental property open-for-inspection on the weekends. I wonder if Rudd and co. will be such canny economists.

And first home buyers will be kept as tenants-in-waiting a while longer.

[Julia]

Quote: Originally Posted by yonnie hi folks, just read today in the newspaper that the rules have been amended to allow SMSF to borrow in certain limited circumstances. apart from that your trust deed must also allow you to do that. anybody know what those limited circumstances are?

[numbercruncher]

Quote: Govt reverses SMSF borrowing ban Ruling clears way for instalment warrants By Madeleine Collins Mon 29 Oct 2007 The Government has backflipped on a longstanding ban on borrowing by SMSFs. The Federal Government has backflipped on a longstanding ban on borrowing by self-managed superannuation funds (SMSF). Instalment warrants are now an eligible form of gearing for an SMSF, following an amendment to the Superannuation Industry (Supervision) Act that allows a gearing exception to the ban. The amendment became effective late last month. The Australian Taxation Office has determined that an investment by an SMSF in an instalment warrant is an in-house asset of the fund. The asset must be one that the super fund trustee is permitted to acquire and hold directly. The gearing exception covers unlisted and listed instalment warrants and certain geared acquisitions such as real estate. It means SMSF trustees will potentially be able to borrow far more in order to buy shares or lifestyle assets, such as boats, cars, artwork and property. An instalment warrant allows the buyer to pay an initial fee to acquire an underlying asset with an option to pay a second fee to acquire the legal title of that asset. Before 1999, SMSFs could borrow through a unit trust arrangement, but Australia's then prime minister, Paul Keating, overhauled the provision. Townsends Business and Corporate Lawyers special counsel Michael Hallinan said it was possible the Federal Government had not realised the scope of the legislation. Speaking at a seminar on October 17, Hallinan said the impact would go far beyond the title "investment by superannuation funds in instalment warrants". "Arrangements other than instalment warrants will be included in the borrowing provision," Hallinan said. Hallinan said lenders would have no recourse to sue an SMSF trustee for defaulting on the loan arrangement, for example, if a trustee borrowed to buy property. "If a super fund defaults on the loan, the lender will use the mortgage to obtain the house," he said. Hallinan warned the use of gearing by investors in the pension phase meant they would face non-tax deductible interest payments and capital gains tax when the asset was disposed of. He also warned SMSF advisers would need to make sure they had appropriate securities licensing if the arrangement constituted a financial product such as a derivative. Townsends principal Peter Townsend said SMSFs that could not afford to buy into the tough Sydney property market would now be able to. "Once the rubber hits the road, there's going to be enormous interest in this," Townsend said. The SMSF Professionals' Association of Australia (SPAA) warned trustees to be extra diligent following the change.

[Temjin]

Just what we need, more available credits to solve the already too much money problem we have right now. Looks like assets will continue to inflate for a little while longer.

[Hyperion]

Superannuation funds are generally not permitted to borrow.

s67 of SIS 1993

(1) Subject to this section, a trustee of a regulated superannuation fund
must not:
(a) borrow money; or
(b) maintain an existing borrowing of money

There are a few exceptions:

temporary borrowing to pay a beneficiary
temporary borrowing to cover settlement of securities transactions
instalment warrants - this was recently enacted


I believe it was long standing administrative practice for the Commissioner to allow SMSFs to invest in instalment warrants. However, whether that was permissable in law was doubtful. Government legislated recently by amending s67 of SIS to make it explicity permitted. However if you read the wording of the Act, it mentions "asset" rather than shares. So some have interpreted that to mean that an "instalment warrant" style structure would allow you to borrow to buy direct property. There are a number of conditions such as that the asset must be bought on trust and that the lender cannot have recourse against the borrower (the SMSF trustee) except to sell the asset itself.

I STRONGLY recommend seeking professional taxation advice before you consider borrowing of any kind in your SMSF.

Hyperion

[doctorj]

Great post - thanks!

[yonnie]

so apart from tax considerations
I can now borrow to buy shares and property
as long as only those shares and property are at risk?

wonder how that is possible with futures and cfd`s.
you can buy those for your SMSF but you can not only lose your margin, but the brokers can come after your fund for
a lot more and bankrupt your fund.

[chemist]

Quote: Originally Posted by Hyperion Superannuation funds are generally not permitted to borrow. s67 of SIS 1993 (1) Subject to this section, a trustee of a regulated superannuation fund must not: (a) borrow money; or (b) maintain an existing borrowing of money There are a few exceptions: temporary borrowing to pay a beneficiary temporary borrowing to cover settlement of securities transactions instalment warrants - this was recently enacted

[chemist]

Quote: Originally Posted by yonnie so apart from tax considerations I can now borrow to buy shares and property as long as only those shares and property are at risk? wonder how that is possible with futures and cfd`s. you can buy those for your SMSF but you can not only lose your margin, but the brokers can come after your fund for a lot more and bankrupt your fund.

[yonnie]

I am trading shares with Interactive Brokers.

they have a different system than the Ozzie brokers I know.

I am on a margin account and that means that the initial margin is 50% and the maintainance margin is 25%.

Example: if you have $ 100,000 in cash and shares, you can buy another $ 100,000 in shares and have $ 200,000
in shares and pay interest over $ 100,000.

At that moment you are margined to the limit of 50% because you put down 50% of $ 200,000 in cash and shares.

the maintenance margin is 25%: that means that the value of your portfolio of $ 200,000 can drop 25% to $ 150,000 before you have to deposit cash into your account.

If you dont do that immediately, IB will start selling part of your portfolio to get back to the 50% initial margin.

wonder if this type of borrowing would be allowed under the new rules

yes chemist, you`re right, I overlooked that one. thanks.

[Hyperion]

I think you are allowed to trade CFDs in an SMSF as long as you use cash collateral and not stock collateral. Its in some ATOID or Tax Ruling...

You are not allowed to let another party have a charge over SMSF assets I believe.

Remember you are bound by your SMSF's trust deed and investment strategy. Not sure how CFDs or futures fit into most ppl's investment strategy...

[RustyK]

I have had a brief look at the ability for a superannuation fund to borrow to buy assets and it is not as easy as it sounds. Firstly you need to look at your Trust deed and whether or not you need to amend it. And secondly from what I have seen you need to set up a purpose built vehicle to purchase the asset. I have looked fairly extensively and at this stage the only thing I have seen is called the 'Debt Instalment Trust' by a Law firm in sydney and it costs more than $8000 to prepare the standard docs.
I have also heard that a number of the larger institutions are setting up similar styles of trusts that will be available in the first quarter of next year that should be more affordable.
The general consensus from the people I spoke to was to sit on your hands and see what unfolds over the next 6 to 12 months and that it would be better not to be the first person to move on this. Upon reading the Chartered Accountants magazine there comments were in line with the above.
But it certainly is interesting and if anyone has any further info on the matter I would love to see it.

Cheers

[awg]

Check out the website of Quantum Portfolio Warrants ( I have no affiliation)
and have'nt totally absorbed all the site, quite a lot of specific info..they have an ATO ruling I believe.

You can definately use simple Installment Warrants...ie Telstra T3.

Also some other derivatives, including CFDs

I havent got my head around it all yet. My simplistic understanding is any product that means you can loose more than 100% of your initial specific investment, is ILLEGAL. But I could be wrong about that.

Your trust deed needs to be appropriately up to date.

Very interesting the quote from previous post that Capital gains in the Pension phase may be assessable?? in the instance of leverage. I have not heard about that before, I would be somewhat surprised if that is correct.
It would certainly add a new complication.

Obviously no tax deduction from any loan would be useable, as no tax is payable in the pension phase. But if they start taxing a Capital gain??

I am interested in knowing what, if any, Options strategies are allowable, I think maybe there is another thread similar to this one, but my time is up for now, so I will have to continue my research later.

regards tony

[bvbfan]

T3 is a installent receipt not installment warrant I believe