Australia: Gearing Up For The Future

Last Updated: 10 June 2008
Article by Tara Jones

Just as simpler super begins to look just that – simple – recent amendments to superannuation legislation have opened the door to new borrowing opportunities for super funds.

From September 24, 2007, the general prohibition on superannuation funds from borrowing under s67 of the Superannuation Industry (Supervision) Act (SIS Act), subject to limited exceptions, has been relaxed to allow super funds to borrow to purchase any asset that they would otherwise be able to acquire, subject to certain strict instalment warrant like conditions.

Background to Instalment Warrants

Instalment warrant arrangements in Australia have developed since the 1990's and have typically been created in respect of listed securities, managed investment funds and, more recently, direct property investment. Most notably perhaps was the warrant offered for the privatisation of Telstra (T1, T2 & T3)

An instalment warrant generally gives the holder the right to purchase the underlying asset (eg listed shares) from the issuer (eg a bank) at a particular price on or before a certain date. There are a number of different types of warrants with the design or terms often varying from provider to provider and from product to product.

In the past SMSF trustees have invested in instalment warrants, such as Telstra, on the basis that they did not constitute a borrowing or charge at law. However, in November 2006, it was declared by the Australian Taxation Office (ATO) and Australian Prudential Regulation Authority (APRA) that the use of such products by super funds did constitute 'borrowing'. In response to industry pressure, the Government subsequently amended the borrowing provisions to allow funds to continue investing in these products.

These amendments have wider implications in that they not only confirmed the current status allowing super funds to invest in commercial instalment warrants, but they also allow trustees to put in place their own private instalment warrants in order to borrow to purchase any asset, provided certain requirements have been satisfied. This represents a major concession for superannuation funds where the trustee can now borrow to directly acquire assets such as real property.What are the new rules?

The new exception provided in s67(4A) of the SIS Act sets out how a fund trustee can now borrow money or maintain a borrowing of money under an arrangement where:

  • The borrowing is used to purchase an asset that the fund trustee could have acquired directly without beaching the SIS Act;
  • The asset is held on trust for the super fund so that the fund trustee acquires a beneficial interest in the asset (a security/debt instalment trust is established over the asset);
  • The fund trustee has the right to acquire legal ownership of the asset after making one or more payments; and
  • The borrowing is limited recourse. That is, in the eventuality that the fund trustee defaults on the loan, the lender will have recourse against the 'finance' asset and any other property offered as guarantee. This means that the assets of the super fund will not be at risk under this financing structure.

Further amendments to the in-house asset rules ensure that the establishment of the security/debt instalment trust to satisfy the above rules would not be an in-house asset provided the asset being acquired is the only asset held by the trust and it would not be an in-house asset if acquired directly by the fund.

How it works

The new provisions allow the trustee of a SMSF to enter into a form of limited recourse borrowing. The simple rule to remember is that if the fund can acquire the asset directly, then it can also acquire the asset by borrowing the money through an arrangement described above. The changes still ensure that people cannot use the new rules to avoid in-house asset rules under the SIS Act.

An example of an appropriate transaction would be a residential property acquired from, and leased to, a third party. If, on the other hand, the fund trustee purchased the residential property under the new arrangements from a fund member, or one of the member's relatives, the fund trustee will breach the in-house asset rules on the basis that the residential property would have been an in-house asset had the fund trustee acquired the residential property directly.

A trustee will put down a deposit for the property. The fund trustee nominates for the loan to be advanced by the lender to the entity that

will purchase the asset for the remaining balance and hold it 'on trust' for the fund trustee (remembering the legal owner of the asset must be someone other than the fund trustee, which to avoid confusion may be classified as the Custodian).

In terms of the lender, s67(4A) of the SIS Act contains no limitation on the identity of the lender and there are currently no regulations as to matters such as the setting of interest, the number, frequency and level of repayments, the term of the warrant, or the size of the initial instalment, although usually this is approximately 20%. These decisions are negotiated between lender and the trustee, however where the lender is related, s109 of the SIS Act (arm's length dealings) will apply.

The forms of borrowing which might be considered include:

  • A direct loan from a bank or other financial institution;
  • An indirect loan from a bank or other financial institution (where a member or related entity borrows the required funds providing security from other assets and on-lends the funds to the trustee under arrangements meeting the criteria); or
  • A loan from a related party (either personally from the member or from a related entity)

In addition, the fund trustee has the following options in relation to interest and final payment:

  • Make interest payments over the term of the arrangement, pay the principal and take legal ownership of the asset;
  • Make both interest and principal repayments over the term of the loan, leaving no balance outstanding on the loan at the end of the term.The fund trustee can then take legal title of the asset; or
  • Make some or all of the payments on the loan and then, either on or before the end of the term, direct the Custodian to sell the asset. The fund then pays back any loan outstanding, with the balance of monies, if any, kept within the fund.

If the fund trustee defaults on the loan the lender has the right to sell the asset and recoup the monies outstanding on the loan, remembering the loan is limited recourse. From the outset, the fund trustee has the right to the income generated from the asset. Whether the income received is assessable and any interest paid is tax deductible will depend on whether the fund is in accumulation or pension mode.

Issues for Consideration

The usual SIS Act restrictions will still apply as well as general investment and commercial principles.

Key consideration needs to be given to issues such as:

  • The tax implications (including income tax, capital gains tax, goods and services tax, stamp duty and land tax)
  • Sole-purpose test
  • In-house asset rules
  • Arm's length dealing
  • Related party acquisition rules
  • Cashflow
  • Commercial issues (such as location, capital growth, rental opportunities etc..)


Specialist and expert advice should be obtained before entering into any borrowing arrangement. Both the new nature of this provision and the specific way it needsto be constructed means that getting the right advice is imperative. Failure to comply with the rules will place the entire fund at risk of non-compliance (not just the property) with penalties of 46.5% of the total balance of the fund applicable for breaches.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions