Download - Changes to S
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Changes affecting
Limited Recourse
Borrowing Arrangements
Aaron DunnB.Bus (Acc), CPA, SSA
SMSF Specialist AdviserTM
20 July 2010
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Today’s Session
• Where we’ve come from...
• Proposed changes to Corporations Law
• Limited Recourse Borrowing Arrangements
– Section 67A & 67B– Section 67A & 67B
– Comparison of changes
• Questions
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History of Limited Recourse Borrowing
4 April 2008
ATO release taxpayer
alert, TA2008/5 and
Q&A document on
Instalment Warrants &
Super Funds.
Significant uncertainty
June 2009
Issuing of TR2009/D3 –
super contributions.
SMSF instalment
warrant examples
provided with use of
personal guarantees,
contradictory to
TA2008/5. Finalised as
TR2010/1 on
25/02/2010.
26 May 2010
Superannuation
Industry (Supervision)
Amendment Bill 2010
introduced into
Parliament to make
changes to limited
recourse borrowing
arrangements
(instalment warrants)
7 July 2010
Law takes
24 September 2007
Introduction of section
67(4A) to SIS Act, to
allow for instalment
warrants to operate
and not breach the
borrowing provisions.
still remained 25/02/2010.
10 March 2010
Assistant Treasurer, Senator Nick
Sherry announces changes to tax
law and consultation on
amendments to Instalment
Warrant arrangements
Minister Bowen also announced
changes to licensing
requirements
(instalment warrants)
6 July 2010
Received
Royal Assent
Law takes
effect
17 July 2010
Election
called,
proposed
reviews,
reforms and
Bills now on
hold (maybe
permanently)
9 June 2010
Exposure draft
of
Corporations
Amendment
Regulations
2010
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Proposed changes to Corporations Law
• Exposure Draft – Corporations Amendment
Regulations 2010
• Proposed amendments intend to:
– Make limited recourse borrowing arrangements financial
products
– Ensure limited recourse borrowing arrangements are not a
credit facility when acquired by the Fund; and
– An AFSL covering derivatives is taken to also cover limited
recourse borrowing arrangements
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Proposed changes to Corporations Law
• Draft Regulations released 9 June 2010. Submissions were able to be made up to 28 June 2010
• Issues/Concerns:– No distinction between ‘traditional’ instalment warrants and limited recourse
loans (e.g. Property transaction). Are property based arrangements really sophisticated?
– Issue on broad terminology of an ‘arrangement’ in accordance with section – Issue on broad terminology of an ‘arrangement’ in accordance with section 67(4A) (will now be s.67A).
• When is it a financial product? Could there be more than one product issued (i.e. When property is purchased b/w buyer & agent, then again when bank agrees to loan?)
• Who is responsible for issuing the PDS?
– What authorisation is required for those who do not hold a derivatives licence?
• Do you create a ‘carve-out’ for limited recourse borrowing arrangements?
• Many derivatives licence holders would have little or no understanding of superannuation law requirements
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Superannuation law
changes to Limited
Recourse Borrowing
Arrangements
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The new arrangements
• Royal Assent received 6 July 2010
• Effective 7 July 2010
• Repealed section 67(4A)
• Introduced section 67A & 67B• Introduced section 67A & 67B
• New terminology
– Limited Recourse Borrowing Arrangements• no longer defined as Instalment Warrants within the Act
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The definition hasn’t changed
• The borrowings must be for the acquisition of an
asset
• The asset must be held on trust
• The acquired asset is the only asset that the lender
has recourse against in the event of default (limited has recourse against in the event of default (limited
recourse borrowing)
• When the borrowing is fully repaid, the asset must
transfer to the SMSF – Can become an IHA issue where no transferred
There is no revamp of the requirements from s.67(4A)
i.e. these preconditions must still all exist
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How it works
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Summary of changes
Section 67A & 67B (New Law) Section 67(4A) – (Old Law)
Explicitly defines the interpretation of acquirable asset
in the singular
While the Act refers to ‘asset’ in the singular, it is
possible to interpret asset in the plural
Ensures that the recourse of the lender or any other
person against the super fund trustee for default on
the borrowing is limited to rights relating to the
acquirable asset.
The SIS Act limits the rights over the original asset in
terms of the direct lender and associated borrowings.
acquirable asset.
Limits borrowing arrangements to a single asset or a
collection of identical assets treated together as a
single asset.
Allows borrowing arrangements over multiple assets
which may permit the lender to choose which assets
are sold in the event of a default on the loan.
Clearly defines circumstances under which assets can
be replaced
Allows arrangements where the asset subject to the
borrowing can be replaced at the discretion of the
trustee or the lender
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‘Acquirable’ Asset
• Defined as a ‘single asset’ or a ‘collection of identical assets’– Replaces concept of “original asset” within s.67(4A)
• EM defines single acquirable asset to include:– A parcel of identical shares in a single company or units in
a unit trust that have the same market value. For example, – A parcel of identical shares in a single company or units in
a unit trust that have the same market value. For example, #10,000 BHP shares.
• Note - any collection of assets must be bought and sold as a collection; there can be no partial sell-down, DRP, etc.
– The land and house/building for any real property acquisition.
• Furnishings/Non-fixtures not included. Would require separate borrowing.
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Personal Guarantees
• The use of personal guarantees are allowed, however
the rights of the lender and any other person against
the Fund Trustee are limited to the acquirable asset
– Protection against claim on other fund assets
• Unlikely for “shortfalls” to count as contributions
– Where trustee/member is guarantor in personal capacity –
appears shortfall paid personally does not count as a
contribution, as SMSF has right to ‘walk away’ under
limited recourse arrangement.
• This leaves the guarantor totally exposed!!
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Refinancing
• Ability to now refinance existing loans
– Allows for a Fund with cash flow problems to minimise risk of default
• Associated expenses can be included as part of borrowingborrowing
– E.g. Stamp duty, conveyancing, brokerage, loan establishment costs
• A re-negotiation of a borrowing with the same lender with no changes in conditions can occur is not a refinance
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Replacement Asset
• Section 67B, including comprehensive list of ‘what qualifies’
• Examples of what does not qualify:– sold BHP shares and buy CBA shares (as part of change to
investment strategy)
– Property improvements (development)– Property improvements (development)
– Property subdivision
• What is a repair versus what is a capital improvement?– Can use borrowings to maintain or repair to ensure it is
‘functional’ (but not improve)
– Get it wrong and it will risk the complying status of the fund
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Important Dates
Pre 24/09/2007 Section 67(4A) – SIS Act
(to 6 July 2010)
Section 67A & 67B – SIS Act
(from 7 July 2010)(to 6 July 2010) (from 7 July 2010)
Three distinct dates for borrowing requirements
contained within section 67 of the SIS Act
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Where to from here?
• Certainty that limited recourse borrowing is here to stay...– Cooper Review recommended review in 2 years time
• SMSF arrangements will become almost exclusively in property– Very costly to run equities and managed funds directly– Very costly to run equities and managed funds directly
– Use product provider
• Wait and see on details about financial product & derivative requirements
• ATO updated Q&A on limited recourse borrowing arrangements
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Thank-you