Yesterday saw an important step forward for the use of instalment warrant lending inside Self Managed Super Funds with the introduction of Superannuation Industry (Supervision) Amendment Bill 2010. There have been more questions than answers since Taxpayer Alert TA2008/5 was issued by the ATO (along with an extensive Q&A document). Then subsequent to that, the ATO issued the final tax ruling on super contributions, TR2010/1. An announcement earlier this year by the Assistant Treasurer, Nick Sherry on 10 March 2010 indicated changes relating to the tax treatment of Instalment Warrants… and here we are today!
This Bill intends to make changes to address specific issues that have been left open to interpretation on the use of instalment warrants, including personal guarantees, the definition of an asset, etc.
Schedule 1 of this Bill amends the SIS Act to make sure that super fund assets are protected in the event of default on a limited recourse borrowing arrangement.
I have outlined below proposed details that will become law should this Bill receive Royal Assent:
- Section 67(4A) will no longer exist. The new rules will be contained in section 67A (limited recourse borrowing arrangements) & 67B (limited recourse borrowing arrangements – replacement assets) of the SIS Act.
- The definition of an “asset” is to mean singular rather than mean plural (as under the current requirements). This will effectively disallow the custodian trust (bare trust) to hold more than one asset (unless it is a replacement asset).
- However, the definition will allow borrowing arrangements over a collection of assets that are identical and have the same market value. An example of this would be to acquire #500 BHP shares @ $35.00. Importantly, this collection of shares must be acquired and sold as a collection and cannot be sold down periodically.
- The acquisition of real property for the purposes of the acquisition of an asset would constitute the land and house/building. It does not allow for furnishings/non-fixtures to be incorporated within the definition of an asset.
- Clarity is now provided around refinancing an existing limited recourse borrowing.
- Associated expenses in acquiring the underlying asset can be included as part of the borrowing. Examples of these expenses include conveyancing fees, stamp duty, brokerage or loan establishment costs
- A re-negotiation of a borrowing with the same lender that is simply a variation of a loan contract that continues to exist can occur. However, when it relates to a rescission or replacement of the original contract this is regarded as a re-finance and therefore these proposed new rules would apply.
- There is a tightening of the definition of a replacement asset using section 67B to list specific circumstances permitting replacement assets. Those that are listed are the only circumstances where replacement assets are allowed.
- Some examples that do not permit a replacement asset include:
- securities liquidated, traded (or both) for different assets only as a consequence of implementing an investment strategy
- replacement by way of improvements to real property
- replacing a single title into multiple titles as a result of subdivision
- Some examples that do not permit a replacement asset include:
- It is recognised that the acquisition of an asset can be used for expenses incurred in maintaining or repairing an asset, to ensure its functional value is not diminished, but not to improve the asset as this would fundamentally change the nature of the asset used as security by the lender.
- This will be predominantly relevant to real property (residential or commercial)
- The use of personal guarantees will be allowed, however the rights of the lender or any other person against the Fund Trustee are limited to the acquirable asset.
- This is to ensure that the guarantor’s rights against the trustee are limited as the rights of the lender are limited, so that no claim for against the trustee should occur which could give rise to a claim for indemnity from fund assets.
- This change will ensure that the rights of the lender or any other person against the trustee are limited to the rights relating to the acquirable asset. No guarantee arrangements can be enforceable against the trustee other than in respect to the rights relating to the acquirable asset.
- Note: Where the guarantor and trustees are one and the same, this inability to seek recourse against the fund trustee (where there is a shortfall after the sale of the asset) will most likely constitute a contribution and be assessed against the contribution caps.
The table below is an extract of a table taken from the Bill that outlines a comparison of the key features of the proposed new law and current law (on instalment warrants):
|New Law||Current Law|
|Explicitly defines the interpretation of acquirable asset in the singular||While the Act refers to ‘asset’ in the singular, it is possible to interpret asset in the plural|
|Ensures that the recourse of the lender or any other person against the super fund trustee for default on the borrowing is limited to rights relating to the acquirable asset.||The SIS Act limits the rights over the original asset in terms of the direct lender and associated borrowings.|
|Limits borrowing arrangements to a single asset or a collection of identical assets treated together as a single asset.||Allows borrowing arrangements over multiple assets which may permit the lender to choose which assets are sold in the event of a default on the loan.|
|Clearly defines circumstances under which assets can be replaced||Allows arrangements where the asset subject to the borrowing can be replaced at the discretion of the trustee or the lender|
These changes will become effective on the day after the Bill receives Royal Assent.
Furthermore, the ATO has provided an updated Q&A document regarding limited recourse borrowing arrangements by SMSFs. Click here to access this Q&A guidance provided by the ATO.
With the preliminary report of the Cooper Review (Super System Review) recommending a review of instalment warrant lending in a couple of years time, it will be interesting to watch the impact of these changes on the use of instalment warrant borrowing inside SMSFs.
Refer to the links below for further details relating to the Bill and Explanatory Memorandum