Issue: 399
Sent: 22-06-2010 10:03:04
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Resources Tax to Deliver New Investment OpportunityA How To Book Of Self Managed Super FundsEmail Marketing WorkshopsSuper Gearing & Replacement AssetsEmail Marketing Business Opportunity - Helen Bairstow
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Super Gearing & Replacement Assets

Click here to buy - A How To Book of SMSF's by Tony Negline
Tony Negline

This week I thought it a good idea to talk about the super gearing rules looking at it from the point of view of the proposed legislation introduced into Parliament in late May which amends these provisions. The commencement date for the proposed law is currently the date of Royal Assent.

Is it possible under the proposed rules for a super fund's trustee to buy and sell assets in the same bare trust? What might happen with a corporate action such as the proposed takeover offers for AXA Asia Pacific made by AMP Ltd and NAB?

There are many reasons why this might occur. The super fund's trustee might decide to sell the asset held by a bare trustee but is happy to keep the super gearing arrangement in place. There is some conjecture on this point. Peter Townsend (from Townsends Business & Corporate Lawyers) says that in theory it's possible but in practise it is unlikely to occur because most super gearing arrangements specify the asset and if the bare trust no longer holds the specified asset that trust would cease to exist.

Under the legislation introduced into Parliament mentioned above, the government considers that replacing an asset could expose super funds to too much risk and assets will only be permitted to be replaced in specific circumstances.

The proposed legislation provides that shares in a company or units in a unit trust can be replaced as long as the original asset and the replacement asset have the same market value.

If the original asset is an instalment receipt that confers beneficial ownership over shares in a company then the replacement asset must be those shares.

The explanatory memorandum for this proposed legislation was introduced into Parliament says that instalment receipt:

means a limited recourse borrowing arrangement over an 'instalment receipt' as the acquirable asset. This is not to be confused with a superannuation fund using an instalment receipt to purchase an asset in the absence of a borrowing, which is not relevant to the borrowing exemption.

Shares in a company or units in a unit trust can be replaced with shares or units that arise as a result of takeover, merger, demerger or restructure of the original asset.

If the original asset is shares in a company or units in a unit trust then a replacement asset can be a stapled security as long as the stapled security consists of a collection of shares of the same class, stapled together with a single unit or single collection of units of the same class and the replacement occurs under a scheme of arrangement of the company.

Finally units in a unit trust can be replaced with other units in the same unit trust if the replacement asset occurs as a result of discretion granted to the trustee under the unit trust's trust deed.

The explanatory memorandum says that this specifically applies to shares in foreign companies so long as the above requirements are met.

The proposed legislation contains an allowance that other replacement asset circumstances might be placed into relevant regulations.

The explanatory memorandum notes that the following arrangements will not be eligible for the replacement asset rules:

* "includes circumstances where the original asset would otherwise be replaced with an eligible replacement asset plus cash for example shares in X Ltd replaced by shares in Y Ltd and a pool of cash as a result of a takeover of X Ltd by Y Ltd

[It is worth noting that this type of takeover offer is quite common. For example, this offer was made by AMP Ltd and AXA SA in their proposed takeover of AXA Asia Pacific where they offered to provide AMP stock and some cash for the transaction. National Australia Bank Ltd offered AXA Asia Pacific shareholders either all cash or a mix of cash and NAB shares.]

* "replacement asset arising from an insurance claim covering the loss to the original asset

Finally please consider purchasing a copy of my book. Over 400 pages of information on SMSFs. You can look at the contents page at the following link:

The second edition has just been released.

Two options are available - once only subscription - $55 inc GST - or an annual subscription will gives you access to all the updates made throughout the year ($120 inc GST). The book can be purchased at the following link:

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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