This article is more than 24 months old and is now archived. This article has not been updated to reflect any changes to the law.
With the banks having lent money for about 1,000 SMSF instalment warrant arrangements (according to John Wasiliev in "The Australian Financial Review", 27 May 2009), some of the patterns and issues are becoming clear. This article uses a diagram to tell the story of Instalment Warrant Arrangements: how they work, the documents involved, the 'asset's journey' to the SMSF trustee(s), and some of the emerging issues.
By the way, some banks are still coming to grips with how to make limited recourse loans for instalment warrant arrangements.
Julian Smith and Paul Ellis
The law about SMSF Borrowing has changed since this article was written. The article on this page has not been updated. You can link to the changes from the short note at the top of this page.
The article below analyses instalment warrant arrangements. An interactive graphic overview here tells the story visually. There is considerable overlap between the graphic overview and the article The best place to start is the graphic overview which includes:
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Although SMSF trustee(s) traditionally were not allowed to borrow to invest in their SMSF, that changed in September 2007. The law was amended then to allow SMSF trustee(s) to make certain investments in their SMSFs using borrowed money. The relevant borrowing arrangements are known as 'instalment warrant arrangements'.
SMSF trustee(s) can now enter into an arrangement under which they have a right — but not an obligation — to acquire the legal ownership of an asset acquired with borrowed money as long as:
Instalment warrant arrangements under superannuation law are lending arrangements that enable an SMSF (or any super fund) to acquire an asset through a series of agreed instalment payments.
Under the instalment warrant arrangement, an SMSF:
For the period of the loan, the SMSF obtains an interest in the underlying asset and is entitled to all income from the asset. The lender is entitled to interest on the loan and is protected by security over the asset being acquired through the instalment warrant arrangement.
If the SMSF defaults on the borrowing, then the lender may have recourse to the underlying asset only — that is, the lender will have no recourse to any of the SMSF's other assets.
Instalment warrant arrangements:
Any asset that an SMSF is permitted to invest in directly can be acquired using an instalment warrant arrangement. Historically, instalment warrants have been offered by financial institutions as a means for investors to acquire listed securities.
However, after changes in the law in late 20071, any asset may be acquired provided that:
Obvious assets that can be acquired are real property and shares.
After the September 2007 changes to the law, there are no restrictions on who may lend the money.
The Lender can be any of:
Instalment warrant arrangements must be structured as follows:
If the SMSF has:
If a lender requires the SMSF trustee(s) or members to guarantee the loan in relation to the arrangement, then those guarantors must disclaim any rights to recover from the SMSF if they have to pay under the guarantee.
If these conditions are not satisfied, then borrowing money through an instalment warrant arrangement will result in a breach of one or more of the superannuation laws. The breach:
SMSF trustee(s) can use instalment warrant arrangements to acquire real property. There are a number of relevant considerations:
When the asset is sold, the SMSF trustee(s) must use the proceeds of sale to repay the loan.
The balance of the proceeds of sale can then be kept in cash or used to buy another asset.
However, the existing loan cannot be used (by, say, redrawing on the loan) to buy another asset.
The trustee(s) can combine the proceeds with money from a new loan to acquire another asset. If they do that then:
As SMSF borrowing is still a new concept, the superannuation industry, the banks, and even the regulators are still coming to grips with the issues.
Some issues to be wary of are:
For questions or more information about SMSFs, taxation or instalment warrants, call Maddocks in Melbourne (03 9288 0666) or Sydney (02 8223 4100) and ask for a member of the Maddocks Tax and Revenue Team or Superannuation Team.
1 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 new laws 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. All other borrowing was prohibited.
Qualifications: LLB, University of Sheffield, LLM(CL), University of British Columbia
Georgia is a member of Maddocks Commercial team and assists in a variety of commercial and corporate matters for private, public and not-for-profit clients.
Her expertise includes advising on general commercial law, wills and estates law, charities and not-for-profit law along with corporate law.
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