Since 24 September 2007, superannuation funds have been able to borrow to acquire new assets (or replacement assets) provided that certain conditions are met. These are set out in section 67(4A) of the Superannuation Industry (Supervision) Act (SIS) under the somewhat misleadingly titled 'Exception – instalment warrants'.
There are a number of requirements:
- The borrowing must be to acquire a new asset (or a replacement asset).
- The asset must be held on trust so the fund acquires a beneficial interest in the asset.
- The fund has a right to acquire the legal ownership of the asset after making one or more payments.
- The lender's recourse to the borrower must be limited to rights relating to the asset (or replacement asset).
In July 2008, the ATO issued its 'Instalment Warrants in Superannuation Funds - Questions and Answers', setting out its view on some but not all of the issues that this section raises.
In particular, the ATO recognises that the section is not limited to instalment warrants. It applies to any asset that the fund may lawfully acquire. That is to say, any asset that, subject to the other rules in SIS, a trustee may acquire.
The types of trusts on which the asset is acquired are limited as the trust must confer beneficial interest in the asset to be acquired. A borrowing by a unit trust in which the units are held by the trustee of the fund does not meet this requirement. This is not surprising, given the High Court decision in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98.
Related party loans at less than commercial rates are regarded as contributions.
Borrowing at excess interest rates is seen as invoking the sole purpose test.
Issues not addressed
Third party guarantees given by related parties are not addressed. Concern about this issue was expressed earlier by the ATO in TA 2008/5. There is no reason why a guarantee cannot be given on terms such that it does not breach section 67(4A) or the financial assistance provisions in section 65 of SIS.
The terms of such a guarantee must be carefully thought through, as a standard guarantee confers on the guarantor rights of indemnity against the person benefiting from the guarantee, and a right of subrogation to the lender's rights. The guarantee itself need not confer this right of indemnity, it can be an implied contract between the guarantor and creditor ('The Modern Contract of Guarantee', by O'Donovan and Phillips, 3rd edition, page 584).
The guarantee will be unlimited as against the guarantors.
This does not as such breach section 67(4A) - the requirement to limit lender's recourse to the relevant fund assets.
As to subrogation, the general principle is that the surety's right to stand in the shoes of the lender is limited to the rights the lender has - Australasian Conference Associated Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335. So, the right of subrogation does not breach sub-section (4A).
If the guarantor's right of indemnity is not limited against the borrower, section 65(1)(b) of SIS is likely to be breached. Section 65(1)(b) prohibits the trustee giving financial assistance to a member or relative of a member.
If there is a default, the lender will recover as it chooses. To the extent that the guarantor exercises its right of subrogation, this will confer no greater benefit than the lender is directly allowed elsewhere in SIS. This is permitted by section 67(4A). There is no financial assistance as fund resources are not accessed beyond that allowed by sub section (4A) of section 67.
However, the rights under a guarantee need to be limited so that they are limited in recourse to the asset. The surety needs to acknowledge that it has no express general rights of indemnity, thereby giving up any common law rights on the part of the guarantor in excess of the limit. A guarantee limited in recourse to the asset should not amount to financial assistance as it reimburses only to the extent that the trustee is directly liable.
In the case of many assets, the requirement to acquire the asset(s) on a trust will raise the issue of stamp duty. The exception in section 55(1)(b) of the Duties Act 1997 (NSW) needs to be utilised to avoid double duty on the establishment of an apparent purchaser arrangement prior to the acquisition of an asset and the subsequent transfer to the fund. The Commissioner must be satisfied the money has been or will be provided by the real purchaser. The subsequent transfer is exempt under section 57.
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