SMSF Borrowing documents updated to reflect law changes

SMSF Borrowing documents updated to reflect law changes

What are the changes to the law?

The highlights of the changes to the law are:

• The name of the SMSF borrowing arrangements has changed from 'Instalment Warrant Borrowing arrangements' to 'Limited Recourse Borrowing arrangements'.

• The SMSF can use the borrowed money to meet expenses incurred in connection with the borrowing - for example: conveyancing fees, stamp duty, brokerage or loan establishment costs. Previously, it was uncertain whether the money could be used for those expenses.

• The concept of 'single acquirable asset' has been clarified, and narrowed, in relation to shares etc.

• The SMSF can refinance its borrowing.

What new rules? Can I take a look?

Parliament is considering a new bill which proposes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act).[1] You can access a copy of the bill, and explanatory memorandum, here.

The bill was introduced to Parliament on 26 May 2010. It will be examined by the Senate Economics Legislation Committee which is due to file a report by 15 June 2010.

When will the new rules apply?

The new rules will apply to super fund borrowing arrangements made from the day after the Bill receives Royal Assent — which is the last stage of the enactment process after both Houses of Parliament have passed the Bill.

However, the rules will apply to any existing arrangements if (after the bill receives Royal Assent) those arrangements:

• are refinanced; or
• are varied to the extent that the original borrowing arrangement has effectively been rescinded or replaced.

What do the new rules clarify or change?

The new rules clarify these issues:

• The super fund can use borrowed money only to acquire a 'single acquirable asset' (original asset), except that the money can be used to meet expenses incurred in connection with the borrowing;
• The concept of 'single acquirable asset' extends to a collection of shares in a company, a collection of units in a trust, or a collection of stapled securities (shares in a company stapled to units in a trust) — as long as the collection is of shares, or units, or stapled securities of the same class with the same market value;
• If the original asset purchased is shares, units, or stapled securities, then the original asset can be replaced — but only with shares, or units, or stapled securities, in the same entity and in the same class and of the same market value; and
• The super fund can refinance its borrowing.

What do the new rules restrict?

The new rules add the following new restrictions:

• As discussed above, the concept of 'replacement assets' is limited to replacing shares in companies, units in trusts and stapled securities;
• The rights of any person (not just the lender's) against the super trustee in relation to a super borrowing arrangement are limited to rights relating to the original asset; and
• The only security (that is, a mortgage, charge, lien, etc) which can be given or held over the original asset must be one which is associated with the direct borrowing arrangement.

What has not changed?

For those of us waiting to see whether there is a radical policy shift in the area of borrowing by super funds, it is interesting that the changes really focus on:

• providing some clarity on how the rules work; and
• building in some new restrictions.

But the Federal Government is not proposing a radical reworking of the rules. So:

• super funds can still borrow;
• the arrangements in respect of custodians and custody trusts remain the same; and
• trustees, and their lenders, need to continue to be careful about quarantining rights in respect of default to the single superannuation asset.

What's next?

The new rules are before the Parliament, and Parliament will consider making them law (provided that the Senate Committee provides its report by 15 June) when it sits from 15 June until 24 June 2010 - so hopefully the new rules will be finalised before the end of the financial year.

We will keep you posted.