Speaking to SMSF Adviser, Minter Ellison partner Richard Batten explained the prohibition on borrowing in super was originally lifted to remove uncertainty with instalment warrants.
“There was a concern that while you have an instrument, that in the very general sense of the word could be seen as a security, it is actually structured under Australian law as a loan,” Mr Batten said.
He stressed the differences in risk exposure between investing in direct property via an LRBA and investing in an instalment warrant.
“We perceive the risk that the inquiry is talking about seems to be more oriented around risks associated with the real property market rather than risks that would be associated with investing in vanilla instalment warrant products,” Mr Batten said.
The recommendation does not seek to distinguish between those two scenarios, a Minter Ellison briefing stated.
“Section 67A is an extension of the original exemption which was inserted to allow super funds to invest in instalment warrants like those offered for example in ‘T1’ and ‘T2’ issues of Telstra securities,” the briefing stated.
“It was intended to remove doubt about whether such an investment involved ‘borrowing’, so removing it will simply reintroduce that doubt.”
Mr Batten said an across-the-board ban on borrowing is therefore “probably not the right way to go”, unless the government consciously takes the view that instalment warrants pose a similar level of systemic risk as borrowing to purchase property.
“If [the government] accept the views of the inquiry around the risks that the inquiry is concerned about in relation to these sorts of arrangements, we would encourage them to make sure that there’s careful consideration given to the other circumstances in which this exemption applies,” Mr Batten said.
Instalment warrants and receipts pre date sec 67A and this confirms that SMSFs have always been able to gear if they dont create an obligation to repay or charge the fund assets. Totally agree that these are lower risk investments but also note that the data shows that sensibly geared property has been the best performing asset class in the last 20 years (source: Russell Investments) – so the case for banning geared share OR property investing is very weak.