Bills Digest no. 156 2009–10
Superannuation Industry (Supervision) Amendment Bill
2010
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Superannuation Industry (Supervision)
Amendment Bill 2010
Date introduced: 26 May 2010
House: House
of Representatives
Portfolio: Treasury
Commencement: The day after Royal Assent
Links: The
links to the Bill, its Explanatory Memorandum and second
reading speech can be found on the Bills page, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
This Bill amends the
Superannuation Industry (Supervision) Act 1993 (SIS Act)
to:
- reduce the risks to superannuation funds undertaking limited
recourse borrowing, and
- resolve some uncertainty about the application of the current
exemption from the general ban of a superannuation fund borrowing
funds to invest.
Section 67 of the SIS Act generally prevents a trustee of a
regulated superannuation fund from either:
- borrowing money, or
- maintaining an existing borrowing of money.
There are particular exceptions to this general rule, mostly to
cover a temporary need for liquid funds to settle outstanding
securities transactions or to pay the Superannuation Surcharge (now
repealed).
That said, subsection 67(4A) permits a trustee to purchase
instalment warrants. This subsection was inserted into the SIS Act
in 2007.[1] It is the
consequences of this amendment that has led to this particular Bill
coming before Parliament.
At the time subsection 67(4A) was inserted into the SIS Act in
2007, an instalment warrant was understood to be:
a derivative-based investment product, in
that they derive their value from the underlying asset.
Traditionally, such arrangements provide the investor with the
right, but not the obligation, to buy the underlying asset through
the payment of instalments. Investors in instalment warrants have a
beneficial interest in the underlying asset, subject to a security
interest held by the issuer that secures the payment of later
instalments. Once the investor has made the first instalment they
are likely to be entitled to income from the underlying asset (e.g.
dividends from shares).[2]
These arrangements involved loaning the investor (in this case a
superannuation fund) money to purchase the underlying asset
(usually shares but also now property). Generally the loan is
repaid from the dividend or rent receipts, as the case may be. The
Commissioner for Taxation and the Australian Prudential Regulation
Authority (APRA) had previously identified these products as a
prohibited borrowing under section 67 of the SIS Act. These
products had been marketed to superannuation funds, particularly
self-managed superannuation funds (SMSF).[3] They are, in effect, a form of
negatively geared investment.
Recent research carried out by the current Review of the
Governance, Efficiency, Structure and Operation of
Australia’s Superannuation System (that is, the Cooper
Review) notes that:
Initial interest in instalment warrants was
modest, with only 0.9 per cent of the SMSF population having a
derivative or instalment warrant at 30 June 2008. There are,
however, indications that this trend might have changed in recent
times. Data from Investment Trends’ surveys suggest that more
than five per cent of SMSFs already invest in such
instruments.[4]
In allowing superannuation funds to invest in these products,
the 2007 amendment to the SIS Act specified that the lender must
only have recourse to the underlying assets of the warrant, and to
no other asset of the investor’s superannuation fund.
However, lending practices arose that circumvented this particular
requirement, such as:
- the use of personal guarantees, given by the superannuation
fund trustee to the lender, to underwrite the latter’s risk
in this borrowing arrangement (this appears to occur where the
underlying asset of the instalment warrant is property, rather than
a listed investment)[5]
- borrowing arrangements over multiple assets which may allow the
lender to choose which assets are sold in the event of a loan
default, or
- arrangements where the asset(s) subject to the borrowing may be
replaced at the discretion of the trustee, or the lender.[6]
These developments reduce the security of a superannuation
fund’s investments by reducing the control a superannuation
fund trustee has over their investments and potentially allowing
the borrowing to be secured against a wider range of assets of the
fund, as well as assets outside the fund. This is not the intent of
section 67 of the SIS Act.
Recent developments in government policy on superannuation
contributions have led to increased use of borrowed funds by SMSFs.
From 1 July 2009 annual contributions to superannuation funds, by
or on the behalf of, an individual could not exceed:
- $150 000 in after tax contributions (or $450 000 over a three
year period),[7]
and
- $25 000 in tax deductible contributions (such as Superannuation
Guarantee contributions) (or for a limited period $50 000 if
contributor is over 50 years of age).[8]
In the recent Budget the Rudd government proposed a slight
relaxation of these limits.[9]
It is argued that these limits restricted a person’s
ability to build up substantial superannuation concessions,
especially in later working years. Superannuation fund members
therefore have a higher incentive to undertake negative gearing
investment strategies permitted by the provisions of section 67 of
the SIS Act in order to rapidly increase the level of their
superannuation benefits. [10]
Of course, the concessional tax environment inside a
superannuation fund makes it attractive to undertake negatively
geared investments. This is of particular relevance to an SMSF in
relation to residential property, as individual investors usually
invest in this particular asset class and such funds are the domain
of individual investors.[11]
The proposed amendments are related to the recently announced
alteration of the Corporations Regulations 2001 to classify certain
borrowing arrangements permitted under the SIS Act as
‘financial products’. When these regulations are
altered instalment warrants marketed to superannuation funds will
be subject to the consumer protection provisions of the
Corporations legislation. Amongst other things this means that
these warrants can only be offered to superannuation funds by
licensed financial service providers.[12]
The proposed measures were first announced upon this
Bill’s introduction into Parliament on 26 May 2010.[13]
The Bill has been referred to the Senate Standing Committee on
Economics for inquiry and report by 15 June 2010. Details of the
inquiry are at http://www.aph.gov.au/Senate/committee/economics_ctte/index.htm
To date, what press commentary has occurred on the use by
superannuation of non-recourse loans has identified the need for
tighter regulation in this area.[14]
The proposed changes will increase a superannuation fund
trustee’s control over the assets of the fund and prevent
security being taken over superannuation fund assets that were not
purchased with borrowed money.
That said, these changes only apply to arrangements entered into
after these provisions take effect, that is on the day after the
date of Royal Assent. Existing non-recourse arrangements will
continue to be exposed to the problems noted above.
The Explanatory Memorandum to this Bill notes that its
provisions do not have any financial impact.[15]
Item 7 of Schedule 1 to the
Bill repeals existing subsection 67(4A) SIS Act, which contains the
current provisions governing a superannuation fund’s
investment via limited-recourse loans (instalment warrants).
Item 8 inserts new section 67A
into the SIS Act setting out the conditions under which the trustee
of a superannuation fund may undertake and maintain a
limited-recourse loan. Briefly, these proposed new conditions
are:
- the loan is only for the purposes for acquiring a single
acquirable asset (see proposed definition of acquirable
asset below)
- the acquirable asset is held on trust for the superannuation
trustee
- the superannuation trustee has a right to acquire legal
ownership for the acquirable asset by making one or more repayments
after acquisition, and
- the lender’s rights are only secured against the relevant
acquirable asset.
Effectively, proposed section 67A prevents a
lender taking a charge over multiple assets of the superannuation
fund when making a limited-recourse loan. Further, the
lender’s security can only be held against the acquirable
asset. A personal guarantee granted by the superannuation fund
trustee will not be effective in securing the lender’s
interest in that asset.
Proposed subsections 67A(2) and
(3) define what an acquirable asset is.
Briefly, such assets:
- are assets that are not money (whether Australian or any other
currency)
- assets that are legally able to be acquired by the
superannuation trustee, and
- may be a collection of separate items, provided that each item
has the same market value and these items are identical to each
other.[16]
Item 8 also inserts new section
67B into the SIS Act. Effectively, this new section
defines the situations where an asset can be replaced, and still
fall under the provisions of new section 67A.
Briefly, these situations are where shares in a company or units in
a unit trust are replaced with new shares or units, as the case may
be, at equal market value.
Real estate is specifically excluded from this new section. This
means that the superannuation fund trustee cannot be forced to
replace one property with another by the lender.
Item 14 states that the amendments in
Schedule 1 apply to arrangements entered into on
or after the day after Royal Assent. Thus, these provisions are not
retrospective.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2495.
Leslie Nielson
28 May 2010
Bills Digest Service
Parliamentary Library
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