SUPER BORROWING GENERALLY

he trustee of a superannuation fund will often, by virtue of the trust deed of the fund, have the power to borrow, in limited circumstances and subject to strict requirements.

RELATED PARTY LOANS

A member of a fund, or a related party of that member such as a spouse or business partners, can lend money to the fund.

The rules which members must abide by in lending funds to a superannuation fund are as follows:

  1. the borrowed money is applied to acquire an asset (which cannot be an asset that the trustee of the fund would otherwise be prevented from acquiring);
  2. the asset is held on trust such that only the trustee of the fund has a beneficial interest in the asset (i.e. under a bare trust / custodian arrangement);
  3. the trustee of the fund has a right to acquire legal ownership of the original asset by making one or more payments after acquiring the beneficial interest;
  4. the rights of the lender against the trustee of the fund are limited to rights relating to the asset and not other assets of the fund (i.e. limited recourse arrangement); and
  5. the asset held in the holding or custodian trust must be the only asset held in that trust.

COMMERCIAL TERMS

Another fundamental requirement is that the parties must ensure that the loan is on commercial terms.

Consideration should therefore be given to, among other things:

  • Drafting a formal loan agreement;
  • Specifying the security, if any, which secures the payment of the loan;
  • Charging a commercial rate of interest;
  • Ensuring that the loan to valuation ratio (LVR) is under normal commercial limits;
  • Obtaining personal guarantees from members or other parties.

LOW OR NO-INTEREST RELATED PARTY LOANS

If loans from related parties are on a low or zero interest basis, then it is likely that the Australian Tax Office as regulator will apply the Non-Arm’s length income provisions of the Tax Act, and tax the income from the arrangement at the highest marginal rate, rather than the concessional rate of 15%.

It is important that any related party loans to superannuation fund be received carefully to ensure compliance with the provisions of the Superannuation and Taxation Laws.