The ATO's views on SMSFs borrowing

The Australian Taxation Office, acting as regulator of Australia's 360,000-plus self-managed funds, is looking closely at how SMSFs borrow to invest using instalment warrants.

In the words of assistant commissioner for superannuation, Ian Read, the use of instalment warrants by SMSFs in a way that is in breach of the superannuation law is "on our radar" for 2007-08.

Read's warning follows amendments to the Superannuation Industry (Supervision) Act, in effect from September 24, which unequivocally allow SMSFs to borrow to invest using instalment warrants - provided stringent conditions are met.

The change in the law is in spite of the general, long-standing bar on funds using borrowed money to invest. The general borrowing bar remains in place and the recent amendments should be seen as an exception.

The tax office's signal that it intends to target borrowing by funds under the new amendments for possible breaches of the law is not surprising. Some superannuation, tax and investment advisers forecast that the amendments will trigger a fast-growing trend over the next couple of years for funds to borrow to buy shares and direct property.


One Sydney superannuation and tax lawyer Robert Richards, principal of Robert Richards & Associates, for instance, says that even though the borrowing amendments are headed "instalment warrants", the measures apply to borrowing by funds, with or without warrants, provided the new borrowing rules are stringently followed. (You should seek professional advice before acting.)

Under the rules set out in the amendments, a SMSF can borrow to invest provided the asset is held in trust for the fund until it acquires legal ownership after the final payment, the lender cannot have security over any of the fund assets, and a fund can only still buy assets that it is already allowed to acquire under superannuation law.

Ian Read makes it clear that the tax office will be examining fund transactions to identify possible breaches of any of these stringent rules - including giving security over fund assets for loans and trying to acquire assets that are not permitted under superannuation law. As an example, Read refers to funds attempting to acquire residential property from members - a transaction that is barred under superannuation law.

(See: http://www.ato.gov.au/corporate/content.asp?doc=/content/00109674.htm)


If your SMSF is going to use a borrow-to-invest strategy using the recent amendments, take extreme care. The tax office is watching for any breaches. Please liaise with us before you do anything here.