New Legislation For Super Gearing Introduced

The Superannuation Industry (Supervision) Amendment Bill 2010 has just been introduced to Parliament with the stated intention of reducing the risks for superannuation funds investing in limited recourse borrowing arrangements.

The Bill effectively re-writes the existing provisions, with s.67(4A) being repealed and two new sections, section 67A and section 67B, being substituted.

We will provide a more detailed review of the new provisions shortly but in the meantime we note the following:

Investing in shares more difficult

1. The new laws require the borrowing to be used to acquire a single acquirable asset. The Government apparently saw potential for increased risk to super funds where the fund acquired multiple assets with the loan thereby giving the lender the right to select among those assets for the one against which to exercise the security.

2. The definition of acquirable asset will make it impossible to borrow to invest in a mixed parcel of listed shares unless each separate companys shares in the parcel are the subject of a separate borrowing or the investment is through another vehicle (asset) that can fall within the definition, such as a managed fund.

Refinancing approved

3. Refinancing has now been officially approved with a specific reference in the Bill. So not only will the original loan comply but any re-financing of that loan (including any outstanding interest) will also comply.
4. The refinancing exception will also apply to current SMSF loans.

Loan can be used to pay borrowing expenses

5. The complying loan can be used to pay for not only the acquisition of the asset but for expenses incurred in connection with the borrowing or acquisition including maintaining or repairing the acquirable asset (but not renovating). So loan money can be used for such things as conveyancing fees, stamp duty, brokerage and loan establishment fees.

Personal guarantees not banned but limited

6. Personal guarantees have not been banned but the right of indemnity by the guarantor against the fund has been limited to the acquirable asset. This means that if the lender takes a third partys guarantee as part security and if the lender calls on that guarantee, the guarantor who would normally have a common law right to indemnity from the guaranteed person (in this case the fund) now has only a limited right, namely to the acquirable asset.

Bill is not retrospective

7 The Bill will generally apply to all limited recourse borrowing arrangements entered into on or after the commencement date. If a fund wants to invest in a mixed parcel of shares then it needs to do so before the commencement date of the new act.

If you would like to receive further information regarding this and other SMSF information please email your name, email and contact details to Townsends Lawyers on info@townsendslaw.com.au .