Business Law e-bulletin
Borrowing by Super FundsAs many would be aware, recent changes to the superannuation laws now enable super funds to borrow money to purchase assets and thereby gear up their holdings - a concession likely to appeal to many clients. The major banks are currently launching new products designed to meet the expected demand. However, in the rush to take advantage of these changes, there is risk that critical requirements will be missed, some less obvious than others, with potentially disastrous results. Until recently, the circumstances under which a super fund could borrow were very restricted. Now, with the addition of sub-section 67(4A) to the Superannuation Industry (Supervision) Act 1993, super funds may borrow from any source, whether a third party financier such as a bank, or a related party, to finance the acquisition of an asset. Although apparently drafted with instalment warrant products in mind, the new rules operate broadly and open a number of possibilities, including:
Certain requirements must be met, the two main ones being that:
In addition, the normal restrictions on the purchase of an asset by a trust fund will apply, such as:
It will also be necessary to check that the trust deed establishing the super fund actually allows borrowing by the trustee, and that the proposed investment is consistent with the super fund's existing investment strategy. Warnings have already been issued by the Tax Office, and each client's affairs will need to be reviewed on their own circumstances to ensure that not only the criteria set out in the SIS Act but also the less-obvious requirements have been met. Non-compliance can lead to serious consequences, with both civil and criminal penalties applying. In the case of a loan from a member not being properly documented, it might result in the contributions cap being exceeded and penalty tax rates being applied. In response to strong enquiry, we have developed a new product designed to establish a bare trust (or "security trust", as it is also called) to enable clients to comply with the new rules. If the lender requires third party guarantees from fund members or anyone else, other documentation may also be required. As an add-on service, we can also prepare trust deed variations if the current deed does not permit the proposed borrowing, and can prepare the loan agreement itself if the borrowing is from a related party. Please don't hesitate to contact Paul Stephens on 5337 0262 or Kent Mallinson on 5337 0250 for further information and pricing.Our Offices
"Building quality relationships with clients"
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April 2008
Paul Stephens
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