ATO Gives Green Light To Guarantees By Members Of Self-Managed Superannuation Funds

The ATO has issued a draft taxation ruling which, if finalised, will effectively end the debate over whether or not loans to self-managed superannuation funds can be guaranteed by a member of the superannuation fund in their own right.

The draft ruling makes it clear that loan products developed by gadens lawyers for superannuation funds will not result in a contribution being made to the superannuation fund either as a result of a guarantee being given by a third party or as a result of that guarantee being called upon by the lender.

The issue

The insertion of section 67(4A) of the Superannuation Industry (Supervision) Act (SIS Act) in September 2007 introduced a major exemption to the prohibition on borrowing by superannuation funds. Since the enactment of this section, and the development of lending products in compliance with the requirements of this section, industry commentators have been divided over whether or not a member of a self-managed superannuation fund is permitted to provide a guarantee.

ATO draft taxation ruling

The draft taxation ruling (TR 2009/D3) which deals with superannuation contributions ends this debate by acknowledging situations in which guarantees given by members of a superannuation fund will amount to a contribution.

TR 2009/D3 acknowledges that lenders making loans to self-managed superannuation funds under section 67(4A) of the SIS Act often require members of the superannuation fund to provide a guarantee in their own right. This acknowledgment by the Commissioner makes it clear that guarantees by members of the superannuation fund are not prohibited (as some commentators previously claimed).

However, equally important, paragraphs 134 – 137 of the Appendix to the draft ruling specifically deal with situations in which these guarantees will (and won't) amount to a contribution to the superannuation fund by the guarantor.

Paragraph 135 states that the Commissioner considers that a contribution is made where a debt of a superannuation fund is forgiven and the capital of the fund is increased by extinguishing the liability of the superannuation trustee to repay the loan. However, paragraph 137 goes on to make it clear that if a liability to one party is simply extinguished in favour of a liability to another party, there is no contribution, as in such situations there is no increase in the capital of the fund.

When will a guarantor make a "contribution" to a superannuation fund?

First (and perhaps most importantly), it is clear from the draft ruling that the mere giving of a guarantee by a member of a superannuation fund will never be a contribution to the superannuation fund.

Second, a guarantee will only result in the making of a contribution to a superannuation fund where the capital of the superannuation fund is increased without the superannuation fund providing consideration for that increase in capital. Therefore, if a superannuation fund defaults under a loan and their liability under that loan is extinguished by the lender selling the property purchased with the borrowed funds, no contribution will be made if the lender also makes a claim against the guarantor for any shortfall in the loan repayment received as a result of the sale of the property. The "top up" paid by the guarantor cannot be a contribution according to the draft ruling, because the payment by the guarantor to the lender is not "an extinguishment of the superannuation trustee's liability to the lender" as in the case of default, the superannuation fund was only ever liable to the lender for the value of the property purchased with the borrowed funds.

In practice, there are only two situations in which a guarantor could ever be deemed to have a made a contribution to the superannuation fund. These are situations where:

1. the guarantor voluntarily makes one or more loan repayments on behalf of the superannuation fund and allows the superannuation fund to acquire the legal interest in the property securing the loan
2. a guarantee is called up by a lender following default by the superannuation fund (without the lender exercising their rights against the real property) and the superannuation fund is then permitted to acquire the legal interest in the property securing the loan without having made any or all payments due under the loan.

These events will not amount to a contribution if appropriate documentation is used. This documentation prevents the bare trustee (often referred to as the "Property Trustee" or "Security Trustee") from transferring the legal title in the property purchased with the borrowed funds unless and until the superannuation fund reimburses the guarantor for any amount paid by the guarantor under the guarantee. In this way, a superannuation fund will never be able to obtain an increase in the capital of the fund without providing consideration for that capital increase.

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