Australia: Self-managed Superannuation Fund update

On 10 March 2010, the government released information dealing with superannuation funds which borrow money or invest in instalment warrants.

The announcements dealt with two issues:

• to classify the sale of instalment warrants to superannuation funds as a financial product
• to make it clear that the tax consequences of a transaction undertaken by a fund using a trustee to hold the asset belong to the fund and not the property trustee.

Neither have a significant impact on the ability of SMSFs to purchase real estate and borrow to assist that purchase.

Classification as a "financial product"

Click here to see the press release made by The Hon Chris Bowen (Minister for Financial Services, Superannuation & Corporate Law) regarding proposed changes to the Superannuation Industry (Supervision) Act (SIS Act).

The proposal is to classify "certain borrowing arrangements by superannuation funds" as "financial products". As result these types of borrowing arrangements would be regulated by the Corporations Act.

It appears that this may relate to structured and packaged products sold to superannuation funds and often styled as an instalment warrant rather than a direct borrowing. We consider that these instalment warrant arrangements have always been correctly classified as "financial products" and it would seem that these changes will merely clarify what has always been the true legal classification of these products.

In other words, we consider it is likely that this proposal does not extend to 'private' transactions where an SMSF borrows to purchase real estate secured by a mortgage granted by the property trustee and where the property trustee is established by the members.

These 'private' transactions should not be complicated by additional regulation, and should be able to be set up by qualified advisors such as accountants and lawyers. Finance brokers (who will be subject to national regulation from 1 July 2010) should continue to be able to arrange finance for these transactions. We propose to lobby to make it clear that the proposal does not extend to 'private' arrangements.

Even if the new proposals do impact on 'private' arrangements, any change will not be retrospective and will not commence until three months after the legislation is passed. So, if there is a need to change the marketing and disclosure arrangements, there will be ample time to make the necessary arrangements.

Tax treatments of instalment warrants

In addition the Assistant Treasurer, the Hon Nick Sherry today announced that the Government proposes to amend the tax law to confirm the practice of treating the investor in an instalment warrant over a single exchange traded security in a company, trust or stapled entity as the owner of the listed security for income tax purposes.

It was also announced that a superannuation trustee who enters into a non-recourse borrowing arrangement for the purpose of purchasing an asset, as permitted under subsection 67(4A) of the SIS Act, will be treated as the owner of the asset for income tax purposes. This is broadly consistent with the current "look-through" approach for bare trust arrangements (see, for example, Interpretative Decision ATO ID 2003/804). The proposal seems to extend this current treatment to borrowing arrangements where the property trustee under the arrangement has a more active role in managing the asset and should resolve any residual debate on this issue.

It is proposed that the measures will confirm that the SMSF trustee will be assessed on any income earned on the underlying asset and the SMSF trustee will be able to claim any relevant deductions in these circumstances. This falls in line with the current understanding for 'private' real estate investments by superannuation funds.

The government has announced that these tax amendments will take effect from the 2007–2008 tax year (ie from the introduction of section 67(4A) of the SIS Act.

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