Law firm points to flaw in mooted SMSF ban

Richard Batten from Minter Ellison said 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 told The Adviser's sister title, SMSF Adviser.

Mr Batten stressed the differences in risk exposure between investing in direct property via a limited recourse borrowing arrangement 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, according to a Minter Ellison briefing.

"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 may therefore be unwarranted unless the government believes instalment warrants pose a similar level of systemic risk as borrowing to purchase property.

[Related: Associations form battlelines on SMSF borrowing]