Gearing and Self Managed Super Funds

GEARING YOUR SELF MANAGED SUPER FUND

Training Room, Level 12,
Law Society of NSW
170 Phillip Street, Sydney
Thursday, 30 October 2008 5.15pm for 5.30pm start.
Presenter: Leigh Adams
Principal, Leigh Adams Lawyers

 
1.  BACKGROUND

Following changes to the Superannuation Industry (Supervision) Act 1993 (Cth) (‘the SIS Act’) by the Tax Laws Amendment (2007 Measures No 4) Act 2007 (Cth) in September 2007, if a loan arrangement satisfies section 67(4A) of the SIS Act, the trustees of regulated superannuation fund can borrow or maintain borrowings.

2.  SUMMARY OF NEW LAW

Section 67(4A) provides that a borrowing by the Fund Trustee is not prohibited by s67(1) (i.e. it is a Complying Loan) where:

• the borrowed money is applied to the acquisition of an asset. I will refer to the person from whom the asset is acquired as the Vendor;

• the asset is of a type which the Fund Trustee is permitted to acquire. For example, it could not be an asset that the Fund Trustee is prohibited from acquiring from a related party under s66, or an in-house asset that would result in the fund exceeding the allowable limit for in-house assets under s71;

• the Fund Trustee is not the legal owner of the asset. Instead the asset must be held on trust so that the Fund Trustee acquires a beneficial interest in it. I will refer to the legal owner of the asset as the Custodian;

• the Fund Trustee has the right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest. Note that this refers to a right, not obligation, to acquire; and

• the lender’s rights against the Fund Trustee for default under the loan are limited to rights in respect of the asset (i.e. the borrowing is limited recourse).

• any other rights that the lender may have against the Fund trustee are limited to rights that the Fund trustee has in relation to the asset.

What does Section 67(4A) not say? In particular, s67(4A) is silent with regard to the following:

• the identity of the lender – this could be a bank, or equally a member or other related party of the fund. It could be the Vendor;

• the identity of the Custodian – this could be a person controlled by the lender, or equally a member or other related party of the fund. Again it could be the Vendor, or the lender itself;

• the amount of the payment(s) that the Fund Trustee must make in order to exercise its right to acquire the asset;

• whether the Fund Trustee may have an obligation, not just a right, to acquire legal title to the asset from the Custodian (although the Explanatory Memorandum to the Bill, and the ATO website publications, state that this is not permissible, even though this is not stated in s67(4A));

• the term of the loan;

• the interest rate;

• whether the loan is principal and interest or interest-only;

• whether the loan is secured;

• whether the loan is personally guaranteed by a third party, for example a member of the fund or other related party; and

• whether the lender has any third party security, such as a mortgage over real estate owned by a member of the fund or other related party.

3. Other SIS Considerations

Consideration must always be given to other provisions of the SIS Act including:

• the in-house asset rule (s71);
• the related-party acquisition rule (s66);
• the sole purpose test (s62);
• the arm’s length dealing requirement (s109).
• the investment strategy requirement (s52(2)(f));
• the prohibition against charging (Reg 13.14); and

It must be noted that section 67(4A) merely sets out the features of a loan arrangement that is not prohibited under the SIS Act. It does not affect the rules governing the trustee’s powers to acquire an asset nor does it affect the trustee’s powers to use borrowed funds to acquire that asset. As such, the rules of the superannuation fund must allow for the superannuation fund to enter into a debt arrangement which complies with the terms of section 67(4A). If the rules do not allow for the debt arrangement to be entered into, then the rules will need to be amended before the superannuation fund can enter into the arrangement.