Using a Super Fund
to Borrow
Investment Restrictions
Super Funds have a specific set of rules that set out the restrictions in
relation to investments. These include:
- Lending to members and their
relatives.
- Acquisition of assets from
‘related parties’ of the fund.
- Borrowing by superannuation
funds.
- In-house assets.
- Investments must be made and
maintained on an ‘arms length’ basis.
These rules are quite complex and
professional advice should be sought if a Trustee is uncertain as to the
legality of a proposed investment transaction.
Changes to the Borrowing rules
From 24 September 2007, changes to the SISA and in particular the adding
of subsection 67(4A) mean that super funds can, within quite specific
constraints, invest in some instalment warrants or enter into a similarly
structured arrangement involving borrowing money to acquire a permitted
asset.
The specific requirements that need to be met to fall within this
exception to the borrowing prohibition are as follows:
- the money has been used to
acquire an asset that is permitted to be acquired by the super fund
(i.e. would not be able to be used to purchase a residential property
from a related party);
- the asset must be held on trust
so that the super fund trustee acquires a beneficial interest in the
asset;
- the super fund trustee has a
right to acquire the legal ownership of the asset by making one or more
payments after acquiring the beneficial interest;
- the rights of the lender
against the super fund trustee for default on the borrowing or on the
amount borrowed and charges relating to the borrowing, are limited to
the rights relating to the asset itself (i.e. the lender should not have
any charge over any OTHER assets of the fund); and
- any additional rights that the
super fund trustee may have over the asset are to not extend the
lender’s rights (i.e. the lender will always be limited to having a
charge over the original asset ONLY).
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How will it
work?
A separate trust needs to be created to hold the asset which is going to
be acquired as a result of the borrowing. This will generally be a bare
trust or fixed trust – in which the super fund is the beneficial owner of
the asset.
The lender can then use the asset held by the trust as security for the
borrowing. The super fund borrows the money and collects any revenue
generated by the asset (i.e. rent or dividends).
There is a very specific way in which the trust and loan arrangements need
to be undertaken in order to qualify under these new rules. If this method
and documentation is not adhered to, then the fund will be breaching the
borrowing rules and potential many other SIS investment restrictions as
well.
The parties involved are set out as follows:
When the loan is eventually paid off – then the ownership of the asset is
transferred back to the Super Fund – there will be no further stamp duty
or capital gains tax event at this time (as the super fund was always the
beneficial owner of the asset).
Super Matters provides specialist superannuation services, including fund
administration and structuring advice.
Should you have any questions on Self-Managed Superannuation, please do
not hesitate to contact us.
Disclaimer: The advice provided is general advice only as, in
preparing it, we did not take into account your investment objectives,
financial situation or particular needs. Before making an investment
decision on the basis of this advice, you should consider how appropriate
the advice is to your particular investment needs, and objectives. |
