For some time now it has been possible for superannuation funds to borrow for the purpose of acquiring a specific asset. The superannuation laws are very prescriptive as to the form of borrowing allowed.
This document outlines the requirements under the superannuation legislation and provides practical guidance concerning the implementation of these arrangements.
CRITERIA FOR BORROWING IN SUPERANNUATION
- The borrowing is limited recourse in nature i.e. the lender only has recourse to the asset to recover the borrowed amount.
- The borrowing can only be for a single acquirable assets including expenses incurred with the borrowing or acquisition e.g. stamp duty and loan costs.
- The asset is acquired by a separate legal entity to the superannuation fund however the fund has a right to acquire the asset by making payments under the loan arrangements.
- Any other person providing indemnities against the loan will only have a right of indemnity from the asset acquired.
- The trustee must not be prohibited from acquiring the asset.
In assessing whether to use this type of arrangement people need to consider the following:
- Once the property is acquired inside a superannuation fund, any equity built up in the property is locked inside the superannuation fund at least until retirement age.
- Financiers will usually require a deposit in the order of 30-35% due to the fact that the lender only has recourse to the asset.
- The loan term is usually shorter than a traditional home loan normally in the order of 15 years.
- Additional set up costs for the acquisition in terms of special structures and loan terms make the process more costly than a normal loan.
- Trustee is required to update the superannuation fund’s investment strategy to accommodate the new investment and borrowing arrangements.
Some of the key benefits of these new lending arrangement are as follows:
Asset Protection – Once the asset has been acquired in the superannuation fund, subject to the rights of the lender the asset is protected from creditors.
Low Taxation – Provided the asset is held for greater than 12 months the maximum capital gains tax rate in the sale of the asset is 10%. If sold post retirement age the tax rate on the capital gain may be nil. Net earnings on the property are also taxed at a low maximum rate of 15%.
Asset Accumulation – The benefit of gearing in superannuation allows people to build more wealth inside superannuation over the longer term.
Whilst the superannuation borrowing rules provide people with the opportunity for greater exposure of investment in superannuation, some care needs to be taken to ensure that the strategy is practical and achieves the objectives. Also, due to the fact that any further equity built up in the asset cannot be accessed outside superannuation means that people need to consider the gearing levels carefully before proceeding with this form of transaction.
Should you have any questions concerning the application of these rules or require guidance with the implementation of such a transaction, please contact Murray Howlett or Jason Bayliss on (07) 3023 1300.