The Federal Government has acted on a promise last year to remove any uncertainty over the use of installment warrants by superannuation funds.
The Minister for Revenue and Assistant Treasurer, Peter Dutton said yesterday that after consultation, the Government has decided to legislate to allow superannuation funds to invest in installment warrants of a limited recourse nature over any asset a fund would be permitted to invest in directly.
The Government announced last November that it would consult with industry to determine the precise scope of the amendments to the Superannuation Industry (Supervision) Act 1993.
The Government sought comment on the underlying assets over which installment warrants might be written, the risk to which a superannuation fund was exposed, the suitability of installment warrants as a retirement savings investment product, and the gearing levels, contractual terms and liquidity of installment warrants.
“This will restore the status quo that existed before the Australian Taxation Office and the Australian Prudential Regulatory Authority determined that the installment warrant structure entailed a borrowing,” Mr Dutton said in his statement yesterday. There was no detail of what would be in the legislation or when the new legislation would be introduced.
The Government said in a statement on November 3, 2006 that it would act to allow superannuation funds to continue to invest in installment warrants, consistent with longstanding administrative practice.
Over a number of years installment warrants have been marketed to superannuation funds – particularly to self managed superannuation funds (SMSFs).
The Commissioner of Taxation (responsible for regulating SMSFs) and the Australian Prudential Regulation Authority (responsible for regulating other superannuation funds) have now concluded that these products entail a borrowing for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and are therefore not an allowable investment.
The borrowing prohibition has been in place since the 1980s, and is one of a number of rules in superannuation legislation designed to limit risk in superannuation fund investments.
“While the Regulators have concluded that investment in installment warrants by superannuation funds is not in keeping with the SIS Act, the practice is long standing and widespread and superannuation fund investment comprises a significant proportion of the installment warrant market.
“The Government will legislate to allow longstanding practice to continue, following consultation with industry regarding the precise scope of amendments to the SIS Act,” Mr Dutton said in the November statement.
In order to avoid any disruption to markets, the Regulators have advised that, pending the law change, superannuation funds investing in traditional installment warrants will not be considered to be non-complying under the SIS Act merely because of their investment in those products.
Fund investments in installment warrants must still comply with other superannuation rules; for example, they must not result in fund assets being subject to a charge.
Trustees will still be required to demonstrate the appropriateness of including installment warrants in their investment strategy.
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Comment: this all sounds like a lot of time, effort and expense for no gain or no loss. The actions of APRA and the Tax Office in very belatedly getting around to declare installment warrants a worry and a borrowing, is mind boggling.
Were they becoming worried about their increasing use, the fact that the warrants had grown and morphed into products like turbo warrants?
It all sounds like a bit of official concern a bit too late. The horse had long gone and the stable door was banging loudly.
You can understand worries about leverage in super funds, but with warrants?
They are small beer given the leverage problems in options and other financial derivatives, many of which are over the counter and not exchange traded with liquidity.
And what about super funds trying to boost returns with all sorts of one-off derivatives (see the Qantas takeover and other situations), or pledging money to hedge funds or buyout groups?
