"Better Super" Developments: Investments in Instalment Warrants by Superannuation Funds Segregating

Some further 'Better Super' (formerly 'Simpler Super') amendments have been made to the Superannuation and Income Tax laws concerning investment in instalment warrants and concerning the requirements for segregating pension assets.

Background

On 24 September 2007 further amendments were made to the Superannuation Industry (Supervision) Act 1993 (SISA) and to the Income Tax Assessment Act 1997 (ITAA97).

The amendments have relaxed the borrowing restrictions on trustees of super funds by allowing certain investments in or through instalment warrants. They have also clarified the rules relating to segregating assets used to fund a pension.

Super Funds and Instalment Warrants

The new laws have amended the SISA restrictions on trustees of superannuation funds against borrowing.

Previously, the SISA allowed a trustee of a regulated superannuation fund to temporarily borrow money to pay beneficiaries their entitlements or to cover settlement of security transactions. Now super fund trustees can also borrow money to buy an asset that is to be held on trust for a beneficiary if certain requirements are met. (This is called the instalment warrants exception).

Under the instalment warrants exception, the trustee may enter into an arrangement under which it has a right but not an obligation to acquire the legal ownership of the relevant asset through instalments. The instalment warrants exception also provides two further limitations:

• the asset must be one which the trustee is permitted to acquire and hold directly under the other SISA investment restrictions; and
• where the trustee defaults on repayments of the loan or related fees, the lender is limited to rights relating to the asset only (that is, the lender has limited recourse rights).

The changes also affect the categorisation of in-house assets. An investment in a related trust that is part of an instalment warrant arrangement will only be considered an in-house asset where the underlying asset would itself be an in-house asset of the fund if it were held directly by the trustee.

Segregating Pension Assets

The new laws clarify the provisions relating to segregating pension assets.

The ITAA97 contains an income tax exemption for income derived from assets that are segregated current pension assets: that is, specific assets used to fund a pension.

The amendments basically just change the emphasis of the relevant provisions.

Previously, the ITAA97 provided that a tax exemption was available to super funds for income derived from assets specifically included in a pension account balance used to fund a pension.

Now, assets not specifically included in a pension account balance (for an allocated pension, a market-linked pension or an account-based pension) will not be considered segregated current pension assets. Income derived from these assets will not be exempt from tax. Assets will be deemed not to be included in a pension account balance to the extent that the value of the relevant assets (which would likely be all of the relevant member's assets) exceeds the value of the account balance supporting the pension.

More information

For more information about these changes or about superannuation generally, contact Maddocks on 03 9288 0555 and ask for a member of the Maddocks Superannuation Team.