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.