Category: Investment

SMSF borrowing ban reversed

The Federal Government has overturned a longstanding ban on borrowing by self-managed superannuation funds (SMSF).

Many funds had, for years,been investing in instalment warrants until the Australian Taxation determined that some warrants constituted a borrowing by the fund.

Instalment warrants are now an eligible form of gearing for an SMSF, following an amendment to the Superannuation Industry (Supervision) Act that allows a gearing exception to the ban.

The amendment became effective late last month.

The asset must be one that the super fund trustee is permitted to acquire and hold directly.

The gearing exception covers unlisted and listed instalment warrants and certain geared acquisitions such as real estate.

It means SMSF trustees will potentially be able to borrow far more in order to buy shares or lifestyle assets, such as boats, cars, artwork and property.

An instalment warrant allows the buyer to pay an initial fee to acquire an underlying asset with an option to pay a second fee to acquire the legal title of that asset.

Before 1999, SMSFs could borrow through a unit trust arrangement, but Australia’s then prime minister, Paul Keating, overhauled the provision.

Townsends Business and Corporate Lawyers special counsel Michael Hallinan said it was possible the Federal Government had not realised the scope of the legislation.

Speaking at a seminar on October 17, Hallinan said the impact would go far beyond the title “investment by superannuation funds in instalment warrants”.

“Arrangements other than instalment warrants will be included in the borrowing provision,” Hallinan said.

Hallinan said lenders would have no recourse to sue an SMSF trustee for defaulting on the loan arrangement, for example, if a trustee borrowed to buy property.

“If a super fund defaults on the loan, the lender will use the mortgage to obtain the house,” he said.

Townsends principal Peter Townsend said SMSFs that could not afford to buy into the tough Sydney property market would now be able to.

Townsend said “Once the rubber hits the road, there’s going to be enormous interest in this,” .

Hallinan said the because the arrangements were more complex than normal gearing, they were likely to involve more parties and higher fees.

Baby boomers working longer

Older Australians are working further into their sixties to maintain a comfortable lifestyle, pay off debts totalling $150 billion and fund their retirements, according to evidence contained in ‘Baby boomers – doing it for themselves‘, a report published by AMP and the National Centre for Social and Economic Modelling (NATSEM).

Baby boomers are generally classified as anyone aged between 45 and 64 years.

According to the report, about six in every 10 married males aged 60 to 64 years were still working in November 2006, up from five in every ten only five years earlier. For married females in the same age group, about three in every 10 remained in the workforce, up from around 20 per cent in 2001.

Of the multi-billion dollar boomer debt, only a small amount is covered by mortgages outstanding. One-tenth of couples without children aged 60 to 64, one-fifth of couples with children and about one-sixth of single males have yet to pay off their homes.

Single females in their early sixties are even more likely to have done so – only four per cent still haven’t.

Much of the debt appears to be connected to maintaining less-than-frugal lifestyles.

Boomer households spend more each week than any other group on food, alcohol, transport, personal care and miscellaneous goods and services, and more on recreation – $132 compared to $120 for younger households and $71 for those above 65. As a result, a significant proportion of the survey sample has credit card debt.

The highest sub-group of baby boomers with credit card debt is couples aged 55 to 59 without children (64 per cent), compared to 40 per cent of single male boomers.

*From AMP.

Shareholders may now count as creditors

Deceived shareholders now have a chance to get their money back.

The High Court this morning gave people deceived into investing in precarious companies a better place in the queue for any leftovers.

The much-anticipated Sons of Gwalia decision has reversed the long-standing rule that misled shareholders are not entitled to treatment equal with that of creditors when companies are wound up.

Debts had to be paid to everyone else owed money before duped investors could claim compensation from the remaining assets.

The High Court, by a 6-1 majority, has changed that today.

The court decided that:

The disclosure requirements have been adopted by the Parliament for the protection of persons other than members of the company – including the investing public more generally. The requirements are of concern to corporate regulators, media, industry and university observers, macro-economists and bankers as well as employees and the general public having an interest in corporate disclosures. At the time of the alleged non-disclosures, the respondent was not a member of the company at all. In this sense, the disclosures were not then received in that capacity but as a consumer of corporate information and as an investor.

The full judgment is available here