The ATO has to comply with the Law
Watch for the ATO to come after this with the proverbial sledgehammer!
They have long been dirty on SMSFs purchasing warrants, and are exceptionally dirty on non-recourse loans.
I’m also not sure why you’d WANT to purchase an 80% leveraged property in a SMSF?
G;day Aussie to answer your two questions; 1; yes the ATO has been dirty on warrants particularly with non recourse loans which is why the recent law changes which were initially aimed at shares but has also given SMSF's the ability to safely gear into property.The Ato just like you and me has to comply with the laws enacted by our democratically elected government.
As for your second question of why you'd want to purchase an 80% leveraged property in an SMSF....(with a non recourse loan at best it would be 70% and more realistic 50% leveraged) 2; mate, leveraging is not just about tax savings, using other peoples money is a great wealth builder full stop.
Have a look at a section of the new legislation below that is now LAW and will forever change how some people will invest in property through their SMSF;
Chapter 3
Investment in instalment warrants by
superannuation funds
Outline of chapter
3.1 Schedule 3 to this Bill inserts an exception to the borrowing
restriction contained in section 67 of the Superannuation Industry
(Supervision) Act 1993. This will allow superannuation funds to invest in
instalment warrants of a limited recourse nature over any asset a fund
would be permitted to invest in directly.
3.2 It also inserts a new provision in the in-house asset rules
contained in section 71 of the Superannuation Industry (Supervision)
Act 1993. This will provide that an investment in a related trust forming
part of an instalment warrant arrangement which meets the requirements
of the borrowing exception will only be an in-house asset where the
underlying asset would itself be an in-house asset of the fund if it were
held directly.
Context of amendments
3.3 Section 67 of the Superannuation Industry (Supervision)
Act 1993 prohibits superannuation fund trustees from borrowing money
(with certain exceptions, primarily relating to short term liquidity). The
borrowing prohibition has been in place since the 1980s, and is one of a
number of rules in superannuation legislation designed to limit risk in
superannuation fund investment.
3.4 Sections 82 and 83 of the Superannuation Industry (Supervision)
Act 1993 prohibit superannuation fund trustees from retaining or acquiring
in-house assets representing more than 5 per cent of the value of all the
fund’s assets.
3.5 Subsection 71(1) of the Superannuation Industry (Supervision)
Act 1993 states that an investment in a related trust of the fund is an
in-house asset of the fund (subject to the exceptions set out in Part 8 of the
Superannuation Industry (Supervision) Act 1993).
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122
3.6 Regulation 13.14 of the Superannuation Industry (Supervision)
Regulations 1994 states that a trustee must not give a charge over, or in
relation to, an asset of the fund. This does not apply in relation to certain
charges specified in Regulation 13.15A, however these relate only to
options and futures contracts provided the superannuation fund meets
certain conditions.
3.7 Over a number of years instalment warrants have been marketed
to superannuation funds, particularly self-managed superannuation funds.
Instalment warrants are a derivative-based investment product, in that
they derive their value from the underlying asset. Traditionally, such
arrangements provide the investor with the right, but not the obligation, to
buy the underlying asset through the payment of instalments. Investors in
instalment warrants have a beneficial interest in the underlying asset,
subject to a security interest held by the issuer that secures the payment of
later instalments. Once the investor has made the first instalment they are
likely to be entitled to income from the underlying asset (eg, dividends
from shares).
3.8 The Commissioner of Taxation (Commissioner) (responsible for
regulating self-managed superannuation funds) and the Australian
Prudential Regulation Authority (APRA) (responsible for regulating other
superannuation funds) have come to the view that these arrangements
constitute a borrowing for the purposes of section 67 of the
Superannuation Industry (Supervision) Act 1993.
3.9 The Commissioner has also determined that an investment by a
self-managed superannuation fund in an instalment warrant is an in-house
asset of the fund under section 71 of the Superannuation Industry
(Supervision) Act 1993.
3.10 The Government has decided to legislate to legitimise
investment by superannuation funds in instalment warrants. The precise
scope of this measure has been determined following consultation with
industry. This Schedule gives effect to that decision.
3.11 Funds that invest in instalment warrants must continue to
comply with other legislative requirements. Furthermore, fund trustees
are still required to demonstrate the appropriateness of including
instalment warrants in their investment strategy.
Summary of new law
3.12 An exception to the prohibition on borrowing in section 67 of
the Superannuation Industry (Supervision) Act 1993 will allow a
Investment in instalment warrants by superannuation funds
123
superannuation fund trustee to borrow money in accordance with an
arrangement that has the following features:
the borrowing is used to acquire an asset that is held on trust
so that the superannuation fund trustee receives a beneficial
interest and a right to acquire the legal ownership of the asset
(or any replacement) through the payment of instalments;
the lender’s recourse against the superannuation fund trustee
in the event of default on the borrowing and related fees, or
the exercise of rights by the fund trustee, is limited to rights
relating to the asset; and
the asset (or any replacement) must be one which the
superannuation fund trustee is permitted to acquire and hold
directly.
3.13 In addition, the in-house assets rules are amended to provide that
an investment in a related trust forming part of an instalment warrant
arrangement which meets the requirements of the borrowing exception
will only be an in-house asset where the underlying asset would itself be
an in-house asset of the fund if it were held directly.
Comparison of key features of new law and current law
New law Current law
Subsection 67(4A) of the
Superannuation Industry (Supervision)
Act 1993 will provide an exception to
the borrowing prohibition for
borrowings that meet certain conditions
commonly found in instalment warrant
arrangements.
Section 67 of the Superannuation
Industry (Supervision) Act 1993
prohibits superannuation fund
trustees from borrowing money
except in limited circumstances,
primarily related to short-term
liquidity.
Subsections 71(8) and (9) of the
Superannuation Industry (Supervision)
Act 1993 will provide that an
investment in a related trust forming
part of an instalment warrant
arrangement which meets the
requirements of the borrowing
exception will only be an in-house
asset where the underlying asset would
itself be an in-house asset of the fund if
it were held directly.
Section 71 of the Superannuation
Industry (Supervision) Act 1993
defines ‘in-house assets’ to include
an investment in a related trust of the
fund.
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124
Detailed explanation of new law
3.14 An exception to the prohibition on borrowing in section 67 of
the Superannuation Industry (Supervision) Act 1993 will allow a
superannuation fund trustee to borrow money in accordance with an
arrangement that has the following features:
the borrowing is used to acquire an asset that is held on trust
so that the superannuation fund trustee receives a beneficial
interest and a right (but not an obligation) to acquire the legal
ownership of the asset (or any replacement) through the
payment of instalments;
the lender’s recourse against the superannuation fund trustee
in the event of default on the borrowing and related fees, or
the exercise of rights (typically a put option) by the fund
trustee, is limited to rights relating to the asset at the time of
the action. These rights may include taking possession of, or
disposing of, the asset; and
the asset (or any replacement) must be one which the
superannuation fund trustee is permitted to acquire and hold
directly. The asset may be any asset (eg, real property, works
of art in certain circumstances or listed securities) a fund
would be permitted to invest in directly. The existing
investment restrictions, such as those on in-house assets and
acquiring certain assets from a related party of the fund,
continue to apply.
[Schedule 3, item 1, subsection 67(4A) of the Superannuation Industry (Supervision)
Act 1993]
3.15 An investment in a related trust forming part of an instalment
warrant arrangement which meets the requirements of the borrowing
exception in subsection 67(4A) of the Superannuation Industry
(Supervision) Act 1993 will only be an in-house asset under section 71
where the underlying asset would itself be an in-house asset of the fund if
it were held directly. [Schedule 3, item 2, subsections 71(8) and (9) of the
Superannuation Industry (Supervision) Act 1993]
3.16 This means an investment in an instalment warrant will not be
automatically counted against the in-house asset limit. However, the new
provisions will not allow fund trustees to circumvent the existing in-house
asset rules. Where the underlying asset would have been an in-house
asset had the superannuation fund invested in it directly, an investment in
the instalment warrant will be an in-house asset. Where the acquisition of
such an asset would breach the in-house asset rule if it were held directly,
Investment in instalment warrants by superannuation funds
125
the investment in an instalment warrant over that same asset will not be
permitted.
Example 3.1: Limited recourse
ABC shares currently trade for $2.
The T. Do Super Fund (the Fund) buys an instalment warrant over an
ABC share for $1.10 from Bank X (the Issuer) on 1 January 2007.
The completion payment is $1 to be paid on 1 January 2008.
The Issuer acquires an ABC share for $2, effectively loaning the Fund
the completion payment on a limited recourse basis. The share is held
by a separate security trust.
The extra 10 cents the Fund paid constitutes a pre-payment of the
interest on the $1 loan and charges to cover the Issuer’s risk.
During the year, the Fund receives all dividends that ABC pays to its
shareholders.
On 1 January 2008 the Fund has the option to pay the completion
payment of $1 and gain full ownership of the ABC share.
Alternatively, the Fund can choose not to pay the $1 final instalment,
in which case the issuer could sell the share and pay the Fund any
excess in proceeds over the $1 loan. Should the ABC share sell for
less than $1 (the value of the loan) the Issuer cannot recover the
shortfall from the Fund.
As the rights of the Issuer are limited to the rights relating to the ABC
share, the requirements of subsection 67(4A) of the Superannuation
Industry (Supervision) Act 1993 are satisfied.
Example 3.2: In-house asset restriction
Five per cent of the Fields Family Super Fund’s assets are in-house
assets for the purposes of section 71 of the Superannuation Industry
(Supervision) Act 1993.
The trustee of the fund is prohibited from acquiring further in-house
assets by section 83 of the Superannuation Industry (Supervision)
Act 1993.
Therefore, the trustee can not use an instalment warrant arrangement to
acquire a beneficial interest in another in-house asset, for example, an
investment in an instalment warrant over a share in a company
controlled by a member of the Fields Family Super Fund, as this would
breach the in-house asset restriction.
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126
However, the trustee can use an instalment warrant arrangement to
acquire a beneficial interest over an unrelated asset, for example, listed
shares in an unrelated company. As the underlying asset would not be
an in-house asset if held directly, the investment in the instalment
warrant trust will not be an in-house asset and there will be no breach
of the in-house asset restriction.
Example 3.3: Replacement asset
The Lees Family Super Fund buys an instalment warrant over shares in
RK Company from Little Lender.
RK Company merges with JF Company. RK Company shares are
reissued as shares in RKJF Co as a scrip for scrip roll-over.
The instalment warrant continues with shares in RKJF Co as the
replacement asset.
This arrangement is covered by subsection 67(4A) of the
Superannuation Industry (Supervision) Act 1993.
Giving a charge over an asset
3.17 ‘Shareholder application’ style instalment warrants generally
involve the use of a fund’s existing equity holdings (traditionally, but not
limited to, listed shares) to purchase instalment warrants. That is, the fund
trustee transfers the legal title of an existing asset to a security trustee in
exchange for instalment warrants over that asset. The fund trustee may
also receive cash, generally the difference between the price of the
warrant and the market price of the asset.
3.18 The Commissioner and APRA, in their roles as regulators of
superannuation funds, have determined that such an arrangement involves
the fund trustee placing a charge over an asset of the fund (Joint Press
Release of 16 December 2002). The operating standard set out in
Regulation 13.14 of the Superannuation Industry (Supervision)
Regulations 1994 prohibits a trustee from giving a charge over, or in
relation to, an asset of the fund.
Application and transitional provisions
3.19 These amendments will apply from the day this Bill receives
Royal Assent.
3.20 Existing technical breaches will continue to be managed through
the discretionary powers of the Commissioner and APRA.