Instalment Warrant Review

After a careful reading of the Proposals Paper issued in relation to the review of the taxation treatment of instalment warrants our lawyers’ view is that:

1. In relation to traditional instalment warrants over listed securities – the tax act will be amended to ensure that they are taxed on a look through basis:  this means – the security trustee is ignored for tax purposes and the investor will be treated as the owner of the underlying listed security.  It seems that this approach will only apply if the underlying asset is a listed security.  If the underlying asset is not a listed security then the arrangement will be treated as a non-traditional instalment warrant.

2. In relation to limited recourse super borrowing (ie borrowing arrangements which satisfy the terms of s67(4A) of SIS) – these arrangements will be taxed on a look through basis: ie the super fund will be treated as being the owner of the property (whether listed security or real estate) which is the subject matter of the arrangement and the existence of the security trust will be ignored.

3. In relation to non-traditional instalment warrant arrangements over real estate (and possibly non-listed securities) – these arrangements will not be accorded look through tax treatment.  The security trust will be treated as a trust for Div 6 purposes and the investor will not be treated as the owner of the real estate but as a beneficiary of a trust.

If the security trust deed is carefully drafted, our lawyers’ believe that the super fund will be absolutely entitled to the real estate and so already have a look through tax treatment.  Any amendment of the tax acts for that effect will be welcome but strictly may not be necessary.  Also, if the security trustee has no active duties and the leasing of the real estate is undertaken by another entity then, from a GST point of view, any taxable supplies will be provided by the other entity and not the security trustee.

It seems the non-traditional warrant arrangements are the real target of the policy change and not super gearing.

We are not certain of the meaning of the comment by Minister Bowen that the Corporations Act will be amended to provide that limited recourse borrowing arrangements are to be financial products.  Possibly this comment is to be restricted to arrangements where the subject matter of the borrowing arrangement is a listed security rather than real estate.