On 6 July 2010, changes to borrowing provisions of the Superannuation Industry (Supervision) Act 1993 (SISA) came into force. The practical implications will mean that it will be more costly to acquire more than one asset via the borrowing provisions. Further, if the asset acquired is land, it cannot be developed or subdivided. The changes could also effect borrowing arrangements put in place before the new laws were passed, if those arrangements are re-financed.

A borrowing arrangement involving a superannuation fund (Fund) will no longer be called ‘an instalment borrowing arrangement’. This description was unclear. The arrangements will now be known as ‘limited recourse borrowing arrangements’, which term refers to the nature of the borrowing. That is, the borrowing must be of a limited recourse nature, meaning that if the trustee of a Fund were to default in making payments under the arrangement, the lender could not have access to the Fund’s assets – only to the asset or a replacement asset acquired under the arrangement.

Section 67(4A) has been repealed and in its place section 67A sets out the requirements of a limited recourse borrowing arrangement. They are:

• A Fund can borrow money or maintain a borrowing of money if the money is applied to acquire a single acquirable asset;
• The borrowed money can also be used for expenses such as conveyancing fees, loan application fees, and stamp duty (which under the old law was not permitted);
• The borrowing can be refinanced;
• The asset must be held on trust (by a custodian) so that the Fund acquires the beneficial interest in the asset and the custodian the legal interest;
• The Fund may acquire the legal interest once all of the repayments have been made;
• The lender may, on default, only exercise its rights against the asset or a replacement asset, and not the Fund’s assets; and
• A charge may be granted to the lender(s) over the asset (but not the Fund’s assets).

The requirement that the borrowing arrangement apply to the acquisition of a single asset is new. This means that a Fund can only acquire one asset per arrangement (e.g. one property). The new section also allows the acquisition of one “collection” of assets. This means that one set of shares (i.e. in the same company) can be acquired. If a Fund trustee wished to acquire 100 BHP shares and 100 Rio Tinto shares, two separate arrangements would need to be put in place. This would mean two separate loan applications (and their associated fees), and two separate sets of legal documents. Two separate custodians to hold each set of shares would also be required. This is due to section 71(8) of SISA. This section provides that investments in related trusts will not be in-house assets if the only asset acquired by the custodian is the one asset acquired via the borrowing arrangement. In practice this will mean if two assets are acquired, two custodians may need to be incorporated.

Section 67A (1) (a) now expressly provides that the borrowed money can be spent on maintaining or repairing the asset, but cannot be spent on improving the asset. Accordingly, if the asset acquired is vacant land, the borrowing cannot be utilised to build apartments on the land, or to subdivide it. However, the Fund could expend its own money to build apartments on the land or to subdivide it. Alternatively a related party could be engaged to undertake these tasks (which would need to occur on an arm’s length basis under section 109 of SISA), with that related party seeking funds from an external lender. Usually an external lender would not be willing to lend moneys without being granted some form of security. So long as the security granted is neither over the asset (i.e. the land acquired via the borrowing arrangement) nor any other asset of the Fund, the related party could offer its own asset as security.

The new provisions of SISA will apply to arrangements entered into on or after the day the provisions came into effect (i.e. 7 July 2010). Further, the new provisions will apply if existing arrangements are refinanced. This means where a Fund has acquired land under the old instalment borrowing arrangement provisions and intends to subdivide it, any refinancing of the original instalment borrowing arrangement after the subdivision would not qualify as an exclusion to the prohibition on borrowing by superannuation funds. Consequently the Fund could only continue to comply with SISA if the original instalment borrowing arrangement was dismantled.

For further information on anything in this article or related topics please contact the author: 

Naomi Pavlakis
Associate
03 9611 0172
npavlakis@harwoodandrews.com.au