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Self Managed Super Fund (SMSF) Article
Tread carefully through the minefield of new gearing rules
By Tony Negline.
This article may be out of date.
16th June 2010
Super gearing involves the purchase an asset or assets using borrowed money. The asset must be an asset which a super fund is permitted by the super laws and the fund's trust deed to own. The asset must be held in a security trust, which some people call a bare trust, until the loan is repaid.
A security trust is not a discretionary trust, unit trust or a hybrid trust, that is, a trust with both discretionary trust and unit trust features.
The super gearing rules began in Septeber 2007 and most of the transactions that have been put in place to date have involved commercial real estate. Typically the business owners want their super fund to own their business' premises and have used the super gearing rules to implement this transaction.
A much smaller number of transactions have involved residential property. An even smaller number of transactions have involved other assets such as listed shares.
Anyone interested in implementing a super gearing strategy in the next year or so needs to be aware that the legal structure of the strategy will be changed in the near future.
In late May 2010 the Federal Government introduced into Parliament revised super gearing rules that will apply to transactions completed from the date this proposed legislation receives Royal Assent.
Attempting to predict a likely commencement date for these new laws is fraught especially in an election year when its outcome seems difficult to predict.
The purpose of the legislative amendments is to deal with potential problems in the current rules caused by personal guarantees, on-lending or related borrowings, multiple assets or where assets are replaced.
Perhaps the biggest planned change relates to the word "asset". The current super gearing rules say that a security trust can hold an asset. At present most people interpret this word to mean the singular or plural. By assuming the plural it is possible to hold more than one asset and different types of assets in a security trust.
The Government intends to amend this rule so that only one asset can be held. It will be possible however to hold a collection of identical assets, for example, 100 BHP Billiton shares. However under this new rule it will not be possible to hold a basket of shares in the one security trust.
Under the proposed changes, refinancing of the super fund's loan will be specifically permitted. At present the current rules are not entirely clear.
Also under the proposed laws it will be possible to borrow all expenses involved with purchasing, maintaining or repairing an asset. This will be welcome for investors who wish to borrow the conveyancing fees, stamp duty, brokerage, and loan establishment fees.
Borrowing to renovate or improve an asset is not currently permitted and this rule will remain in place. This means that a super fund will not be permitted to redevelop a block of land using the super gearing strategy.
At present the use of personal guarantees has been a source of much controversy. The Tax Office say that that such guarantees are currently allowed. If the guarantor does not exercise their right to indemnity then the amount foregone might be seen as a contribution.
Under the new borrowing rules, guarantees will be permitted however will be specifically restricted to the asset that is purchased. This change is seeking to stop a guarantor from using their common law right to indemnity from the guaranteed person or entity – that is, the super fund.
Under current rules the ability to replace an asset in a super gearing security trust has also been the subject of much controversy. For example it has been argued that the current rules permit arrangements which demand a super fund trustee replace an asset if its value falls below a certain amount with another asset of greater value than the outstanding loan.
The government considers that this could expose super funds to too much risk and assets will only be permitted to be replaced in specific circumstances.
Under current and future rules it is not possible to put an asset a super fund owns into a super gearing arrangement.
Importantly these revised rules the current legislation before Parliament will not apply to arrangements finalised before these new rules commence.
To help everyone how to understand the current rules and these potential new rules work the Tax Office has updated question and answer material on its website. You can view that material at: http://www.atcbiz.com.au/r.php?r=585nxdw
None of these changes change the overall complexity of the transaction. It is absolutely essential specialist advice is taken before contemplating or completing these transactions. If all the necessary steps in the transaction are completed in the wrong order then it's possible to pay ad valorem stamp duty two or more times.
In April, Ministers Bowen and Sherry released a discussion paper about the tax treatment of various structures including these super gearing arrangements. The purpose of the discussion paper was to ask what changes to various tax rules the government needed to make to ensure that the super gearing arrangements have appropriate tax rules so that no unintended consequences arise.This document and the proposed document show that these super gearing arrangements will be with us for awhile longer.
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