DIY funds await green light
Tuesday, September 18, 2007
Self-managed super funds will get an investment
fillip with a Senate decision allowing them to
borrow. By Michael Laurence.
A bill is expected to be passed by the Senate this week that will trigger extensive borrowing by
self–managed superannuation funds to snap up residential and commercial property.
"Expect an avalanche of new gearing products aimed at DIY funds to follow," says Sydney tax
and superannuation lawyer Robert Richards.
The raft of tax and super measures due for debate by the Senate in the final session of
parliament includes amendments that will legally allow self-managed funds to borrow to invest,
provided stringent rules are met.
This marks a complete turnaround in superannuation law that has prohibited borrowing by selfmanaged
funds since the 1980s. And the about-face is despite the Australian Taxation Office
and the Australian Prudential Regulation Authority (APRA) issuing a joint ruling late last year
that investing in instalment warrants by self-managed funds to effectively gear assets was a
breach of the legal ban on borrowing. The regulators' move created uproar among selfmanaged
funds and their advisers.
The government immediately responded to the stand from the regulators against de facto
borrowing using instalment warrants by announcing the legislation before the Senate. The
ATO, as regulator of Australia's 360,000 self-managed funds, and APRA backed off from a
crackdown given the imminent change in the law.
Trustee members have had good reason to feel confused. Numerous self-managed funds have
long used instalment warrants to buy mainly equities and investment funds. And some product
promoters had gained ATO product rulings that Richards understands were limited to the tax
aspects rather than the prohibition on borrowings by super funds.
Richards says that although the borrowing provisions before the Senate are under the heading
of "instalment warrants", the changes will simply open the way for funds to borrow with or
without warrants, provided the new borrowing rules set out in the legislation are strictly
followed.
The bill will allow a self-managed fund to borrow to invest, provided the asset is held in trust
for the fund until it acquires legal ownership after final payment, and the lender cannot make a
claim against any of the fund's assets in the event of default – other than the one related to the
borrowing.
Richards says that borrowing arrangements under the bill will enable self-managed funds to
receive an income from the asset being purchased while it is held in trust. Interest on the loan
will be deductible, and capital gains tax will not be triggered when it is transferred from the
trust to the fund.
Vincent Scully, chief executive of boutique financial services group Calliva, says the passing of
the bill will clear away the uncertainty involving borrowing to invest by self-managed funds.
"Any uncertainty [in the financial industry] is bad," Scully says. "Now the ground rules have
changed."
Scully argues that borrowing to invest provides self-managed funds with a smart way to deal
with the new super regime from July that limits annual contributions by members yet makes
super much more effective with tax-free benefits for those over 60. "You can build up the
appreciating assets in your super [by borrowing to invest], making your super money work
much harder."
Richards is among the professional advisers who believe that the bill will provide tremendous
confidence for self-managed funds to gear to borrow to buy the commercial and residential
properties of their choice.
Many self-managed funds have been unable to directly own residential and commercial
properties because the cost far exceeded the members' super savings and because of the bar
against borrowing.
A superannuation writer with publisher Thomson ATP, Stuart Jones, warns in the Australian
Financial Planning Handbook 2007-08 that under the bill a self-managed fund will only be
allowed to borrow to buy assets that are permitted under super law. A fund is barred, for
example, from acquiring residential property from a member but can acquire business property
from members.
Melbourne superannuation lawyer Dan Butler, principal of DBA Butler, urges self-managed
funds to take extreme care about borrowing to buy properties. Members' retirement savings
could be jeopardised if the property fell significantly in value.
Butler says that products with packaged finance generally charge higher-than-market interest
rates because of their inability to make a claim against assets of the fund, other than the asset
involved in the transaction, in the event of a default. He predicts more self-managed
negotiate their own financing arrangements.
Richard Taylor | Australia's leading private lender
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