Borrowing within your Super Fund

The rules have changed….for the better.

 Yes, you can borrow in a superannuation fund

For a while now superannuation funds to have been allowed to borrow funds to acquire certain assets, provided they follow the rules.

Past restrictions have now been removed and funds can be borrowed from traditional lenders, like banks, or from related parties, even the members themselves.

Loans must be a “limited recourse borrowing”

The new legislation refers to “limited recourse borrowing arrangements” and applies to all future borrowing arrangements including purchases which are yet to be settled.  Logically unsettled contracts should be reviewed.

Conditions of the loan

Under the new provisions, a borrowing must have the following features:

  • Borrowed funds must be applied to purchase a “single acquirable asset”;
  • The asset is held in a separate trust, with the superannuation fund having a beneficial interest in the asset;
  • The superannuation fund has the right to acquire the legal ownership (or replacement asset) after full repayment of the loan; and
  • The recourse of the lender is limited to the specific asset alone.

Now you can also:

  • refinance an existing borrowing; and
  • borrow to fund repairs and maintenance,

but you cannot borrow to:

  • acquire multiple assets or
  • fund capital improvements.

Single Acquirable Asset

Funds can only borrow to acquire a single asset.

The only real time when more than one asset can be a ‘single acquirable asset’ is where it is a collection of identical assets with the same market value (e.g. shares in the same company). To the contrary, identical apartments within a property development, even if the initial purchase prices are identical, do not qualify.

The single asset rule even outlaws the acquisition of shares in two distinct companies under one borrowing arrangement.

Can you borrow to replace an asset?

Replacement assets rules have been significantly narrowed to apply to specific situations such as replacement listed company shares in the event of takeovers.

What about borrowing to repair or maintain the asset?

The new legislation permits the use of borrowings to fund repairs to property. You are not allowed to borrow to effect initial repairs where the purchase price of the property reflected the need for the repairs. Similarly, borrowing to effect capital improvements is prohibited.

Can I improve an asset acquired using borrowings?

Care needs to be exercised when existing cash investments are applied to improve assets acquired under a borrowing arrangement, you don’t want to have the “improvement” seen as being so integrated with the assets that are the subject of a charge, as it is illegal to charge existing assets.

Borrowing from Related Parties

A superannuation fund borrowing from a related party rather than directly from a bank can be beneficial in the following situations:

  • utilising surplus non-superannuation cash;
  • transferring assets into superannuation; and
  • accessing cheaper bank finance.

Appropriate advice and care needs to be taken when undertaking such an arrangement to ensure compliance with both superannuation and tax legislation.

Arms-length requirements

Any transaction between a superannuation fund and a related party must be undertaken on commercial terms; this includes the interest rate applied, the loan-to-value ratio and payment of establishment costs. Great care is needed here because borrowing arrangements may be deemed contributions (where the superannuation fund benefits) or a failure of the sole-purpose test (where the member benefits).

Registering a mortgage – Division 7A

The best way to demonstrate that the borrowing arrangement has been entered into on commercial terms is to fully document the transaction in much the same way as a financial institution would including registering the mortgage.

While there’s no need to register the mortgage over the property, where a related party is the lender, income tax legislation might mean that you need to register the mortgage where the loan exceeds 7 years but is less than 25 years. If the tax legislation applies, the interest rate applicable to the borrowing arrangement must be equal to or greater than the relevant benchmark interest rate.

More Info?

Don’t make mistakes, the consequences are too great.  If you want to know how to set up the right structure ownership and need advice on how to properly arrange the borrowing, then ring the office on (03) 9585 7555 and ask for Noel or Amanda, orcontact us by email.