Luke Hartsuyker (Cowper, National Party, Deputy Manager of Opposition Business in the House) Share this | Hansard source

I welcome the opportunity to speak on the Superannuation Industry (Supervision) Amendment Bill 2010, which makes some minor changes to the ability of superannuation fund trustees to purchase assets through limited recourse loans. The purpose of this bill is to resolve the uncertainty with the application of the borrowing exemption allowing for limited recourse loans, which reduces the risk to superannuation funds investing through this type of borrowing. Section 67 of the Superannuation Industry (Supervision) Act generally prevents a trustee of a regulated superannuation fund from borrowing money. There are exceptions in the act, such as if there is a temporary need for liquid funds to settle outstanding securities transactions.

In 2007, another exemption was added. The coalition responded to sentiment in the industry to allow an exemption to borrowing requirements of superannuation trustees in terms of limited recourse loans purchased through instalment warrants. These types of loans have become popular with the self-managed superannuation fund sector. The flexibility allowed by SMSFs, including high levels of engagement in choice, are all principles that the coalition has tried to follow in superannuation, and they have informed our amendments to the Superannuation Industry (Supervision) Act. The amendments made to the act in September 2007 allowed superannuation fund trustees to borrow money on a limited recourse basis to acquire any asset that a fund is not prohibited from acquiring directly.

Under these rules, superannuation trustees are able to use instalment loans to fund the purchase of any number of assets. However, the loans made to trustees typically have guarantees placed on them, allowing recovery outside of the assets that the loan was originally intended for. This practice of offering personal guarantees on assets held on collateral outside the specific assets covered by the loan allows lenders to access an individual’s superannuation balance to cover any defaults on a loan. The bill introduced by the coalition in September 2007 was not intended to allow superannuation balances to be used as collateral against a loan. The amendments made by this proposed legislation address this issue and also make a number of other changes to protect the integrity of recourse lending available to superannuation fund trustees.

There are two main amendments to the system of recourse borrowing made by this legislation. Firstly, under the current law, it is possible to interpret ‘asset’ in the plural for the purpose of using recourse borrowing as funding. Again, this was not the intention of the legislation and this bill explicitly defines the interpretation of an ‘acquirable asset’ in the singular. This amendment ensures that the recourse of the lender or any other person against the superannuation fund trustee for default on the borrowing is limited to the rights relating to the acquirable asset. Guarantees on loans beyond the value of the underlying asset will effectively be prevented. Importantly, the amendments are drafted to allow for investments in a particular kind of asset class, and it is their intent that superannuation funds will still be able to borrow on a limited recourse basis to fund an investment in a managed share portfolio. This amendment addresses the situation where a superannuation trustee is able to choose which asset is to be used in order to settle defaults on a debt.

The amendments will allow lenders certainty when judging the risk inherent in lending to a particular type of asset. They will also protect the integrity of an investor’s superannuation balance by limiting the risk to a particular asset and minimising the exposure of the fund to claims made by creditors. The bill clearly defines which assets can replace the assets purchased under a recourse loan for the purpose of designing a dynamic investment strategy. For instance, money is not eligible as a replacement asset under any circumstances. The replacement cannot be improvements of real property and an asset cannot be replaced by an asset arising from an insurance claim covering the loss of the original asset.

The second set of measures contained in this bill makes amendments to the measures allowing personal guarantees as collateral against recourse loans. The situation has arisen from the 2007 amendments where several providers of limited recourse borrowing are requiring trustees or fund members to provide guarantees of the borrowing to underwrite the provider’s risk for the limited recourse nature of an instalment warrant. The amendments will prevent a trustee from using superannuation balances as a guarantee against a default on a limited recourse loan. Again, this protects the balances of superannuants whilst limiting the risk to the asset under which the loan falls. These arrangements are sensible reforms to the legislation. The Treasury held a consultation process in March 2010 where stakeholders were broadly supportive of the changes.

I would like to reflect the view of the SMSF Professionals Association of Australia, or SPAA. I have mentioned before that the coalition is a strong supporter of the self-managed superannuation fund sector. There are approximately 800,000 trustees and members in the sector, but the investments made by SMSFs account for 31.8 per cent of total superannuation assets, or around $400 billion. This is a significant proportion of Australia’s total superannuation asset pool, which currently stands at $1.23 trillion. SPAA have raised two issues with this legislation which will impact on the SMSF sector. It will be the responsibility of the government to monitor the impact of the legislation to ensure that the provisions are working as intended. Firstly, SPAA see no policy justification for banning superannuation loan structures which hold only liquid assets such as a diversified portfolio of listed securities. I have already mentioned that the legislation will enable investments in managed funds from loans to be made on a limited recourse basis, but the SMSF sector believes that this should be more flexible. SPAA admit that section 67A of the act as implemented by the amendments to place a general ban on the use of multiple assets within complying loan structures should contain an exemption for securities listed on the Australian Securities Exchange. The coalition asks that the government and the Treasury continue to monitor the impact of this policy on a number of SMSFs which are able to invest in ASX listed shares and whether the policy has had any detrimental effects.

The second issue with regard to self-managed superannuation funds is relating to personal guarantees. Under the proposals, personal guarantees will not be held over the superannuation balances under the trustee but third-party guarantees will continue being permitted. This means that an individual member of a super fund will be able to make a personal guarantee relating to personal property in order to cover a potential default on a limited recourse loan. This creates the situation where members of small superannuation funds may become personally exposed as a result of a personal guarantee without any recourse to fund assets. SPAA submit that the ban on personal guarantee be extended to all guarantees linked to a superannuation fund complying loan structure. The impacts of these measures need to be monitored. However, without access to any guarantee the lender may be less likely to provide credit for the purposes of purchasing assets in a superannuation fund. In this case the risk of lending might be too high and the creditor will be less likely to lend to superannuation trustees for purchases of assets.

Whilst the government must monitor the implication of the two issues raised by the SMSF sector, the intent of the legislation is to reduce the risk of limited recourse loans to superannuation trustees. The premise of the legislation is that personal guarantees on a limited recourse loan are a risk to superannuation balances. The coalition support the legislation because we support measures that protect superannuation balances from risk that is not connected directly to that superannuation balance, like a separate asset in fact. This is why we do not support measures from the government that intervene in the market and increase the risk to superannuation balances today.

Since the government’s great big new tax on mining was revealed in the press in April, superannuation investments in the resource sector have reduced significantly. The peak of this plunge occurred on 21 May, with a total of $23 billion wiped off superannuation fund investments in resource stocks. The impact of the resources tax, particularly on smaller Australian miners, has been disastrous. This is why the Rudd Labor government is now being labelled ‘a sovereign risk to Australia’ by international investment professionals. The manager of the government’s own Future Fund, Mr David Murray, said:

… if we can’t achieve a design that does not penalise the existing projects—that’s a sovereign risk issue and a design that does not discriminate between recurrent spending and long-term intergenerational wealth creation; if those things can’t be done, the tax should be abandoned.

The chairman of the Australian company Wesfarmers, Mr Bob Every, said:

To change the rules for investors after decisions have been made and costs incurred risks undermining Australia’s position in the international investment community.

So, although the government is looking to minimise risks to superannuation balances by virtue of this legislation, its actions and its broad agenda are a great risk to those very same balances. The ANZ Bank suggested that an international lender in credit markets should compensate for perceived sovereign risk by adjusting the interest rate charged. By lowering the interest rate charged in areas of high sovereign risk, the lender can expand the demand between potential borrowers. The fall in the Australian dollar since April demonstrates the extent to which the exchange rates have moved. A proportion of this fall can be attributed to the increased risk in investing in Australia. The Australian dollar has fallen by eight per cent against the US dollar since April. This is a sovereign risk and a risk to superannuation balances.

The coalition does not support risks to superannuation balances unless the investor has assumed that risk with due diligence. Superannuation investors should not have to worry about risk that is beyond their control. This is one of the reasons the coalition opposes Labor’s great big tax on mining and this is the main reason the coalition supports the amendments to the Superannuation Industry (Supervision) Act. As I have outlined, the bill makes some important amendments and clarification to the exemption in the act allowing superannuation trustees to access limited recourse loans for the purpose of producing or purchasing investment assets. The amendments will limit loans to a single asset or asset class. This will limit the risk to one asset and prevent a member’s superannuation balance from being accessed in the event of a default on the loan. The amendments will also prevent personal guarantees relating to superannuation assets from being used as security against the recourse loan. This protects the balance of an investor’s superannuation account and provides that investor and the lender with certainty as to which asset is attached to the risk involved. The coalition support these principles and we support the legislation. I commend the bill to the House.

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