Govt spotlight on borrowing in super

Government tax and consumer protection proposals made in recent days have put the spotlight on common industry practices around borrowing in super.

The Government has proposed changes to Corporations Regulations 2001 legislation to ensure that borrowing arrangements by superannuation fund trustees are considered financial products.

The proposal would see borrowing arrangements, such as instalment warrants, covered by the Government’s consumer protection framework.

“The measure will ensure that only licensed financial services providers offer these arrangements to superannuation funds,” said the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen.

He noted that the Government has also proposed an amendment to the tax law so that a superannuation trustee who enters into a limited recourse borrowing arrangement to purchase an asset, as permitted under the Superannuation Industry (Supervision) Act 1993 (SIS Act), would be treated as the owner of the asset for income tax purposes.

“The changes will ensure that trustees of superannuation funds who have entered into permitted limited recourse borrowing arrangements will not face CGT [Capital Gains Tax] obligations at the time the last instalments are paid,” Bowen said.

Interestingly, Bowen commented that the Government is aware of “some areas of uncertainty” with regards to borrowing arrangements made under the SIS Act.

Vince Scully of Blackwattle Capital pointed to the common practice of banks taking personal guarantees.

Under the SIS Act, in order for an instalment warrant to be considered as such and be included in the Government’s new ‘look-through’ approach, there must be “a non-recourse borrowing by the investor and no other guarantee from the investor (or associates) to the lender”.

Scully said while this is in place, common practice by the banks is to seek personal guarantees from investors.

“They won’t qualify for the correct tax treatment,” Scully said, referring to the proposed tax changes. He said it appears the Government is well aware of current practice and more questions are now being asked about concerns surrounding a possible gap in legislation.