Instalment Warrant Trust – Limited Recourse Loan

04 December 2008 Topics: Superannuation, Trusts

The Superannuation Industry (Supervision) Act (SIS Act) allows a superannuation fund to borrow to purchase an asset on trust (instalment warrant trust) provided section 67(4A) is complied with.

However, section 67(4A) only allows a trustee to take out a non-recourse loan. That is, the lender’s right of recourse pursuant to the loan documentation must be limited to a right to exercise a power of sale of the property (section 67(4A)(d) of the SIS Act).

If the lender reserves the right to take action against the trustee of the superannuation fund, the loan will not satisfy the requirements of the section.

The standard documents used by one of the major banks (and possibly others) provide that the bank can take action against the trustees of the superannuation fund in limited circumstances (e.g. cases of fraud or misrepresentation).

Cooper Grace Ward recently had a dispute with this bank because we argued that any provision which allowed the bank a right of action against the trustees would breach section 67(4A) – irrespective of whether there was fraudulent conduct.

After protracted discussions, the bank accepted our arguments and amended its loan documents to comply with section 67(4A) of the SIS Act.

The clear message is that, if your clients borrow in their superannuation fund to take advantage of the concessions in section 67(4A), the loan documents need to be carefully vetted to ensure compliance with the section. You should not assume the documents are compliant merely because they are submitted by a major bank.

If you have any questions regarding instalment warrant trusts please contact a member of our team on 3231 2444.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.