Super gearing sends the super world into a spin


At less than 250 words Section 67(4A) of the SIS Act, the new law permitting a super fund to borrow, has had a big impact on SMSF advisers and their clients.  In particular, self managed funds have flocked to put their hands up for it.
To discuss in detail every issue that the legislation raises would take more than the available space for this column but perhaps a quick heads up on some of the more important matters would be useful.
The section was apparently designed to assuage the concerns of the Instalment Warrant industry that their product was prohibited to super funds because it involved a level of gearing.  After much lobbying the government agreed to loosen the constraint and allow funds to invest in instalment warrants. 
The draftsman of the section seems to have gone a bit further than originally intended and the law allows gearing generally provided the fund meets the requirements of the new section.  The words ‘instalment warrant’ don’t actually appear in the section at all except for the heading.
The geared asset must be held on trust for the SMSF trustee.  To avoid confusion we’ll call the trustee of the geared asset ‘the custodian’.  The questions have come thick and fast: Who can be the custodian?  Can it be a member?  Can it be the SMSF trustee?  Is it necessary to use a trustee company?  Some advisers have said that it must be an independent party despite the fact that the section only says that the geared asset must be “held on trust so that the (SMSF) trustee acquires a beneficial interest in the … asset”.  They rely on something called ‘the spirit of the legislation’.
Then, because there’s an obligation under the section that the SMSF trustee must have the right to acquire legal ownership of the geared asset as part of the gearing arrangement, there has been considerable focus on the stamp duty and capital gains tax issues that would flow from a transfer from the custodian to the SMSF trustee once the loan has been repaid.
In NSW, Victoria and some of the other States the stamp duties legislation has what is termed “apparent purchaser” laws which would allow the stamping of a transfer from the custodian to the SMSF trustee with nominal duty as long as it could be proven that the SMSF trustee provided all the money for the purchase and the custodian was therefore only the apparent purchaser and not what might be termed the real purchaser.  Complying with the apparent purchaser law is not as easy as it sounds and great care must be taken as to the timing of the establishment of the relationship between the custodian and the SMSF trustee.
For example, in NSW if the document establishing the relationship between the custodian and the SMSF trustee is executed too early the duty could be $200 instead of nominal duty.  If the document then envisages the purchase of the particular geared asset another section of the Duties Act might stamp the document for full ‘ad valorem’ duty in addition to the ‘ad valorem’ duty payable on the contract for the purchase from the vendor.  Catastrophic.
For CGT purposes there is the need, if capital gains tax is to be avoided, to ensure that the SMSF trustee as the owner of the beneficial interest in the geared asset is absolutely entitled to the asset.
Then there are the compliance issues.  Before undertaking a gearing it is necessary to ask such things as: Does the fund’s investment strategy allow the acquisition of the geared asset?  If not can it be changed? Would such a change be compliant with the SIS Act and or the fund deed?  For that matter does the fund deed allow for the acquisition of the geared asset?  Indeed does the fund deed allow for gearing at all?  What documents should be created to evidence compliance in the gearing process?
Finally there are our old mates at the Tax Office.  On 4 April they issued Taxpayer Alert TA2008/5 setting out a number of their concerns.  Among other things they are concerned that if the lender wants a third party guarantee as additional security (in view of the limited recourse nature of the loan), that third party guarantor must not have an indemnity from the SMSF trustee which effectively circumvents the limited recourse requirement.
Each one of the issues raised here could form the basis of a detailed discussion in its own right, but at least you now have a sense of the traps.  Firms like mine can solve all these issues but once they’re solved you have to then find a lender who understands the rules and has a suitable lending product.  That might be the biggest problem of all.  If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.