The Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) have together urged superannuation funds to exercise extreme caution in the purchase of instalment warrants.

Both regulators warn that the use of a fund’s existing equity holdings to purchase instalment warrants, may breach section 67 of the Superannuation Industry Supervision (SIS) Act.

APRA and the ATO have determined that the use of shares owned by the fund, as security over the in-built loan portion of the instalment warrant purchase, amounts to placing a charge over a fund’s assets.

Under the SIS Act, trustees are restricted in their borrowing and prohibited from giving a charge over the assets of a fund.

No action will be taken against trustees that have invested in instalment warrants using shareholder applications before Monday, 16 December 2002, provided the transaction is finalised within 12 months of that date or at the next reset date, whichever occurs first.

The joint warning has resulted from a marked increase in the proliferation of such geared products in the market utilising shares as security, which are being offered to superannuation funds.

Both APRA and the ATO have issued guidelines to assist trustees in complying with the law, a copy of which is attached.

Trustees of funds administered by APRA can find this information at www.apra.gov.au. Trustees of Self Managed Superannuation Funds will find relevant guidelines at www.ato.gov.au/super.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.