Leverage - don't let the horse bolt too far

History has a habit of repeating itself.  I remember in the mid-90's the threat that the in-house asset rules would be tightened if superannuation fund trustees exploited the loophole which allowed wholly owned unit trusts to be established in order to undertake borrowing which was otherwise prohibited within the superannuation fund itself.  Not surprisingly, the threat was ignored, and indeed the practice increased.  True to its word, the government changed the in-house asset rules, leaving us with the grandfathering provisions in Subdivision D Part 8.

The comments about leverage in the Phase Three - Preliminary Report have a familiar air.  The Panel makes it clear that they don't like leverage (or perhaps it is more correct to say they don't like direct leverage - as they do not seem concerned about managed investment schemes which effectively provide indirectly for leverage).  But they are happy to tolerate it for another 2 years, at which time a review should be held.  By that stage we will have had the instalment warrant rules for around 5 years.

I doubt that in 2 years' time we will have seen borrowing at a level which would cause it to become the 'significant focus of superannuation funds' that the Panel is concerned to avoid.  But if they do, it will be interesting to see what they propose to unwind it.  Will we be left with another set of grandfathering provisions.  I hope not.