Changes to Super borrowing powers (section 67(4A) now sections 67A and 67B)
Since 24 September 2007 super funds have been able to borrow to acquire an asset under an arrangement that meets the requirements of subsection 67(4A) of the Superannuation Industry (Supervision) Act 1993 (SISA). As from 6 July 2010, sections 67A and 67B have replaced section 67(4A).
Section 67A sets out the requirements of a limited recourse borrowing arrangement (note these borrowings are no longer referred to as instalment borrowing arrangements). They are:
1. A SMSF can borrow money or maintain a borrowing of money if the money is applied to acquire a single acquirable asset (s67A(1)(a));
2. The borrowed money can be used for expenses such as conveyancing fees, loan application fees, and stamp duty (s67A(1)(a)(i)). This was not permitted under the old law;
3. The borrowing can be refinanced (s67A(1)(a)(ii));
4. The asset must be held on trust (by a custodian, sometimes called a Security Trustee or Asset Acquisition Trustee) so that the SMSF acquires the beneficial interest in the asset (s67A(1)(b)) and the custodian the legal interest;
5. The SMSF may acquire the legal interest once all of the repayments have been made (s67A(1)(c));
6. The lender may, on default, only exercise its rights against the asset or a replacement asset, and not the SMSF's other assets (s67A(1)(d)); and
7. A charge may be granted to the lender(s) over the acquirable asset (but not the other assets of the SMSF) (s67A(1)(d) to (f) inclusive). The asset being acquired under the arrangement cannot be used as security for another borrowing.
Now for some refresher comments:
Is an SMSF allowed to borrow from a related party? Yes providing the SMSF complies with other legislative requirements - the sole purpose test and comply with existing investment restrictions, such as those applying to in-house assets and prohibitions on acquiring certain assets from a related party of the fund.
What about the interest rate? The investment must be conducted on an arm's length basis or, if the parties are not at arm's length, that the terms of the investment are no more favourable to the other party than they would be if the parties were dealing at arm's length. The SMSF trustee cannot allow a related party lender to charge the fund more than an arm's length rate of interest under the arrangement. Paying a member (or relative) an excessive interest rate would also contravene the prohibition on SMSF trustees giving financial assistance to a member.
The lender calling a member's guarantee - if the SMSF cannot repay the lender and the member 'steps up to the plate', any money paid by themember to the lender will be a contribution to their accumulation account. This may have significant consequences if the member has already made contributions (excess contributions tax) during the year (or even in advance ie the $450,000 over 3 years).
When is it necessary to have the documentation signed? In our opinion the Asset Acquisition Trust (or the Security Trust) must be signed before the offer and acceptance is signed. If the trust is not in existence how can it hold the asset being acquired?
If you require any further information in respect to this Alert, please do not hesitate to contact us at Key Legal Pty Ltd (08) 9388 8850 or email andy@keylegal.com.au