SMSFs – Borrowing – What have they changed?

01 June 2010 Topics: Tax and revenue, Superannuation

On 26 May the Government introduced the Superannuation Industry (Supervision) Amendment Bill 2010 into Parliament to replace the current borrowing exception in section 67(4A) with new sections 67A and 67B.

The proposed amendments do not affect the compliance of any existing structures established by CGW, and apply to arrangements entered into after Royal Assent of the Bill.

The new rules are substantially the same, and really clarify some aspects of the original exemption. Notable changes include:

  • You can acquire more than one asset – but only if they are ‘identical to each other’ and have the ‘same market value as each other’.
    This means you can no longer acquire two properties under the one arrangement (including one over two or more titles), and you can acquire a parcel of shares in the one company. This amendment will not affect compliance of existing structures which have acquired two or more properties.
  • The new rules specify the (limited) circumstances where you can acquire a ‘replacement asset’ – for example where a company is taken over and you exchange shares in the company for shares in the new company.
  • The borrowed funds can be used to pay expenses:
    • associated with the property purchase (for example, stamp duty conveyancing fees, brokerage and mortgage fees); and
    • in maintaining or repairing (but not improving) the asset.
      Despite this amendment, you still cannot borrow to fund a construction.
  • The new rules specifically allow refinancing an existing borrowing. This also applies to existing structures, although after refinancing, the arrangements must comply with the new rules.
  • Guarantees from third parties are allowed provided they limit the guarantors’ right of recourse to the asset.
  • The asset cannot be subject to a charge that is not related to the borrowing.

The ATO has also issued a new Question and Answers document. It provides:

  • a general discussion on the current and proposed positions for instalment warrant arrangements.
  • that once the borrowing has been repaid and the loan arrangement comes to an end, the ATO are of the opinion that the property must be transferred from the instalment warrant trust to the super fund.

The ATO argues that section 71(8) of the SIS Act does not exempt the investment from the in-house asset rules once the loan arrangement has ceased.

We do not agree with this and the property can remain in the instalment warrant trust without breaching the in-house asset rules after the debt is repaid.  However, there is a risk that the ATO will take a contrary view.

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