Issue
Has a contravention of Regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) occurred when a Self Managed Superannuation Fund (SMSF) participates as a borrower in margin lending?
Decision
Yes, a contravention of Regulation 13.14 of the SISR has occurred when the SMSF participated in margin lending as the trustee will have granted a charge over certain assets of the fund as a condition of receiving the funds under the facility.
Facts
The SMSF operated a "margin balance" with a broker's clearing house.
The SMSF borrowed money to purchase shares.
The SMSF gave the shares to the broker as security for repayment of the loan.
The margin balance continued over a period of time at different monetary levels depending on the value of shares on hand. As the purpose of the borrowing under the margin lending facility lies outside the permitted exceptions in section 67 of the Superannuation Industry (Supervision) Act 1993 (SISA), operating the facility also involves the trustee in a prohibited borrowing under section 67 of the SISA.
Reasons for Decision
Regulation 13.14 of the SISR relates to charges over assets of Funds and prohibits the trustee of a superannuation fund giving a charge over, or in relation to, an asset of the superannuation fund. The participation in margin lending requires that shares be held as security for the purchase of additional shares. This represents a charge over some of the assets of the SMSF and is in contravention of Regulation 13.14 of the SISR.
Consequences of Contravention of Regulation 13.14
The trustee will have breached subsection 31(1) of the SISA by virtue of contravening Regulation 13.14 which is an operating standard applicable to the operation of a regulated superannuation fund (including an SMSF). It is an offence under subsection 34(2) of the SISA for a trustee to intentionally or recklessly contravene an operating standard applicable to an SMSF.