Superannuation and Borrowing

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Bank funded borrowing arrangements

  1. The superannuation law contains a general prohibition against super funds borrowing.  This general provision was modified in September 2007 to allow super funds to borrow under certain circumstances.
  2. Whilst the exemption comes under the heading ‘Instalment Warrants’, the rules themselves have much broader application.  In essence, provided the arrangements meet five criteria, a super fund will be entitled to borrow.  Those criteria are:
    (a)  The money borrowed is applied to acquire an asset, other than an asset which the fund trustee would otherwise be prohibited from acquiring;
    (b)  The asset is held on trust so that the fund trustee only has a beneficial interest in the asset;
    (c)  The fund trustee has a right to acquire legal ownership of the original asset by making one or more payments after acquiring the beneficial interest; and
    (d)  The asset held in the trust must be the only asset held by that trust.
  3. It is relevant to note that the arrangements will not permit a super fund to acquire an asset that it could not otherwise acquire.  For example it could not acquire a residence or holiday property to be used by a member as this would breach the sole purpose test.  It could not acquire an asset from a member or a relative of a member unless the asset was business real property or listed shares, as these acquisitions are otherwise prohibited.
  4. Additionally, an aspect of the new borrowing laws is that the legal title of the asset must be held in trust.  Funder & Associates can assist clients in establishing these trusts, under what we call Super Borrowing Instalment Trusts (SBI Trusts).  The trust must be in place before the contract to purchase the asset is signed, or you can end up paying extra costs such as double duty.
  5. Further, there is no prohibition against others providing security, whether over assets outside of the super fund or by way of personal guarantees.  Accordingly, a member of the super fund could allow security to be given over their own personal assets, or give personal guarantees if the Loan to Value Ratio (LVR) otherwise became an issue.
  6. Other assets of the super fund can not be used as security.
  7. As discussed, the limited recourse funding arrangements with financiers that can be structured are illustrated by the two examples below.
    Bank funding – limited recourse secured over property and other personal assets
  8. In this example, the member of the super fund offers their personal assets or acts as a guarantor to provide additional security to the bank to secure the borrowing by the super fund.

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