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Proposed new laws clarify SMSF 'instalment warrant' borrowings

Claire Malone

31 May 2010
The Federal Government has recently introduced a bill to clarify a number of aspects of ‘instalment warrant’ borrowings by superannuation fund trustees under section 67(4A) of the Superannuation Industry (Supervision) Act 1993 (Cth). Given the popularity of these arrangements amongst SMSF clients, the changes provide some welcome clarification.

If enacted, the amendments will confirm that trustees are permitted to refinance existing borrowings. This provides much needed certainty and will assist those needing to restructure their finance, particularly if trustees are at risk of default in times of financial difficulty. The ability to refinance will be available to all SMSF borrowers, including those who have borrowed before the proposed laws take effect.

The changes also make it clear that a guarantee may be provided to support a fund’s loan, provided the guarantor’s rights against the fund’s trustee are limited to the underlying asset. A requirement that SMSF members guarantee their fund’s loan has become standard practice for many commercial lenders. SMSF members should nevertheless be aware of the Australian Tax Office’s view that payments made under a guarantee will generally be treated as a contribution to the fund (refer to TR 2010/1). Therefore, if a trustee defaults and the members are called on under the guarantee, this will still have the potential to create significant excess contributions tax liabilities where the payment causes the members’ contributions caps to be exceeded.

The amendments confirm that borrowed money may be used to pay for expenses connected with the purchase, such as conveyancing costs and stamp duty. Borrowed money may also be used to repair or maintain an asset. Significantly, the proposed laws rule out borrowing to improve an asset, which clarifies that borrowing to finance property development is not permitted for SMSF trustees. However, SMSF investors could borrow to purchase land which is then developed with alternative funding, such as existing cash resources held by the fund.

In addition, the bill introduces some technical amendments that will impact less common borrowing strategies. In particular, SMSF trustees who wish to borrow to purchase shares or units in a unit trust should seek expert advice because the proposed amendments will impact the scope of what may be achieved with these strategies.

The new laws, once enacted, will not operate retrospectively to existing arrangements (with the exception of refinancing, which is available to all SMSF borrowers). However, the explanatory material suggests that at least some of the proposed amendments merely clarify existing laws and do not give rise to a change. For example, SMSF trustees should not rush to borrow to develop property before the express prohibition in the new laws is passed because there have already been concerns that this is not permitted under the existing laws.
 
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Kim Henderson

Principal & Accredited Specialist in Family Law

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