News Detail

SMSF Instalment Warrants

On the 24^th of September last year the Australian Government passed legislation to allow self managed super funds (SMSF’s) to invest in Instalment Warrants. The effect of this legislation means that:

• The trustee of a SMSF can borrow money to acquire an asset that is held in trust so that the trustee receives a beneficial interest and a right, but not an obligation, to acquire the legal ownership of the asset through the payment of instalments. The asset must be one which the trustee is permitted to acquire and hold directly, such as real property or listed securities.
• In the event of default on the borrowing the lender's recourse against the fund trustee is limited.

 
In the last month the Australian Tax Office has now highlighted specific areas that they will focus on with regards to Instalment Warrants, which include:

• Monies advanced by a member or related party at zero or less than commercial interest rates, as these interest savings could be considered to be a contribution.
• Monies advanced by a member at a rate greater than commercial interest rates, as this may breach the sole purpose test and the SIS Act.
• Capitalisation of interest costs which may result in an arrangement which fails to meet the requirement that the funds borrowed are used to purchase an asset.
• Personal guarantees provided to third parties by a member or related party of the SMSF, which may result in recourse on the assets of the fund and not the asset acquired.
• Assets acquired from a related party, which may contravene the SIS Act.

These new laws allowing Instalment Warrents require a separate instalment trust to be established, and for trustees to be able to invest in an instalment warrant the trust deed needs to be able to allow the fund to borrow. Deeds prepared prior to this legislation may prohibit a fund from borrowing and, if this is the case, will need to be upgraded.

Espreon provides services to update SMSFs to the current legislation.