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Super fund borrowing rules: proposed new laws making things clearer

New laws have been proposed to clarify the rules for super fund borrowing through 'instalment warrants', or limited recourse lending.

For super fund (including SMSF) borrowing made (or refinanced or varied) after the changes, the laws introduce:

  • some welcome clarity on the rules; and
  • some important restrictions.

This article has a quick look over the proposed new laws, which are currently before Parliament.

Julian Smith

The proposed changes discussed in this article were implemented as proposed.You can read an article about the changes here.The article sets out:

  • when Cleardocs documents were updated to reflect the changes;
  • which version of the Cleardocs deed is required for SMSF borrowing; and
  • what needs to be done for existing orders.
  • What new rules? Can I take a look?

    Parliament is considering a new bill which proposes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act).[1] You can access a copy of the bill, and explanatory memorandum, here.

    The bill was introduced to Parliament on 26 May 2010. It will be examined by the Senate Economics Legislation Committee which is due to file a report by 15 June 2010.

    When will the new rules apply?

    The new rules will apply to super fund borrowing arrangements made from the day after the Bill receives Royal Assent — which is the last stage of the enactment process after both Houses of Parliament have passed the Bill.

    However, the rules will apply to any existing arrangements if (after the bill receives Royal Assent) those arrangements:

    • are refinanced; or
    • are varied to the extent that the original borrowing arrangement has effectively been rescinded or replaced.

    What do the new rules clarify or change?

    The new rules clarify these issues:

    • The super fund can use borrowed money only to acquire a 'single acquirable asset' (original asset), except that the money can be used to meet expenses incurred in connection with the borrowing;
    • The concept of 'single acquirable asset' extends to a collection of shares in a company, a collection of units in a trust, or a collection of stapled securities (shares in a company stapled to units in a trust) — as long as the collection is of shares, or units, or stapled securities of the same class with the same market value;
    • If the original asset purchased is shares, units, or stapled securities, then the original asset can be replaced — but only with shares, or units, or stapled securities, in the same entity and in the same class and of the same market value; and
    • The super fund can refinance its borrowing.

    What do the new rules restrict?

    The new rules add the following new restrictions:

    • As discussed above, the concept of 'replacement assets' is limited to replacing shares in companies, units in trusts and stapled securities;
    • The rights of any person (not just the lender's) against the super trustee in relation to a super borrowing arrangement are limited to rights relating to the original asset; and
    • The only security (that is, a mortgage, charge, lien, etc) which can be given or held over the original asset must be one which is associated with the direct borrowing arrangement.

    What has not changed?

    For those of us waiting to see whether there is a radical policy shift in the area of borrowing by super funds, it is interesting that the changes really focus on:

    • providing some clarity on how the rules work; and
    • building in some new restrictions.

    But the Federal Government is not proposing a radical reworking of the rules. So:

    • super funds can still borrow;
    • the arrangements in respect of custodians and custody trusts remain the same; and
    • trustees, and their lenders, need to continue to be careful about quarantining rights in respect of default to the single superannuation asset.

    What's next?

    The new rules are before the Parliament, and Parliament will consider making them law (provided that the Senate Committee provides its report by 15 June) when it sits from 15 June until 24 June 2010 - so hopefully the new rules will be finalised before the end of the financial year.

    We will keep you posted.

    More information from Maddocks

    For more information please contact Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

    More Cleardocs information on SMSFs

    Order SMSF related document packages

    Set up an SMSF

    Update an SMSF deed

    Set up an SMSF pension

    Arrange SMSF borrowing lending docs:

    Set up an SMSF corporate trustee

    SMSF Death Benefit Nomination - binding or non binding

    SMSF Death Benefit Agreement - binding and permanent


    Download a checklist of the information you need to order a document package.

    [1] The bill is the Superannuation Industry (Supervision) Amendment Bill 2010


Lawyer in Profile

Julian Smith
Julian Smith
+61 3 9258 3864

Qualifications: BA, LLB, Monash University, LLM, University of Melbourne

Julian is a Partner in Maddocks Commercial team. He advises a diverse range of clients across the Australian commercial and financial services landscape.

Julian's corporate practice spans various sectors, including financial services, professional services, and family-owned enterprises. He advises on:

  • capital raising,
  • disclosures,
  • restructures,
  • mergers and acquisitions,
  • corporate governance,
  • directors' duties, and
  • trusts, corporations, and securities law.

Julianís financial services practice involves advising financial market participants on the entire financial services lifecycle including fund structuring, management options, and compliance with regulatory requirements.

Julian also offers guidance on alternative and disruptive financial services businesses, such as online foreign exchanges, internal markets, and management rights schemes.

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