Some of the uncertainty surrounding the operation of the superannuation borrowing provisions may soon be clarified, as a result of the introduction of the Superannuation Industry (Supervision) Amendment Bill 2010 (Bill) into Parliament on 26 May 2010.

The Bill would repeal the current borrowing exemption in section 67(4A) of the Superannuation Industry (Supervision) Act 1994, and replace this with new sections 67A and 67B.

New section 67A is an updated version of the current section 67(4A), while the new section 67B contains detailed provisions relating to the replacement of an asset, under a borrowing arrangement.

Significant changes to the borrowing provisions include:

  • The borrowing must be applied for the acquisition of a 'single acquirable asset'. This requirement is intended to ensure that a borrowing cannot be used to acquire multiple assets, unless they are a collection of identical assets that have the same market value (eg a parcel of identical shares in a company or units in a unit trust). The Bill's explanatory memorandum sets out a number of acquisitions which would not count as the acquisition of a 'single acquirable asset'. These include acquisitions of shares in different entities, and acquisitions of a number of buildings (even if substantially all the same) on separate strata titles. The explanatory memorandum also states that a borrowing cannot be used to acquire a premises which includes its furnishings. Rather, separate borrowing arrangements would need to be entered into; one for the premises and one or more for the furnishings.
  • The borrowing can be used to pay expenses incurred in connection with the acquisition of the asset (eg conveyancing fees, stamp duty and loan establishment fees).
  • The borrowing can be used to maintain or repair the asset, but it cannot be used to improve the asset. For example, a borrowing could not be used to construct a building on land or to undertake a renovation (other than to make repairs which did no more than ensure that the functional value of the property was not diminished).
  • The borrowing cannot be used to acquire cash. That is, the borrowing cannot be structured in the form of a margin lending facility.
  • Trustees of superannuation funds can refinance existing borrowings. The omission of any ability to refinance under the current provisions appears to have been an error, but has been of concern to those embarking on superannuation borrowing to date.
  • Any rights of a guarantor (or any other person) under a borrowing arrangement against the trustee of a superannuation fund must be limited to the asset. This change, although consistent with the generally accepted industry practice, is welcome as it will alleviate the uncertainty surrounding the use of guarantees in superannuation borrowing arrangements.
  • Provision is made which acknowledges that the asset can be subject to a charge in connection with the borrowing (although the wording is confusing, and may in fact go further than the Government's apparent intention to allow charges only to secure the actual borrowing).
  • The replacement asset provisions have been expanded to provide that replacement assets are limited to replacement shares in companies and units in unit trusts arising out of circumstances such as takeovers, mergers, demergers, restructures, schemes of arrangement or trustee actions. The explanatory memorandum makes it clear that the 'replacement asset' concept is strictly limited, excluding certain events which might have been thought to bring about the replacement of assets within the meaning of the previous law. These include replacement of an asset arising from an insurance claim where the original asset was lost, replacement of title upon a subdivision and replacement of a title to property where there has been Government action such as resumption of part of the property or rezoning. It is also expressly stated in the explanatory memorandum that the buying and selling of shares does not constitute the replacement of assets. The replacement asset provisions are somewhat unclear in their application. It appears, for example, that a fund which has borrowed to acquire property in respect of which a new title has been issued (perhaps through some Government action) would be obliged to discharge the borrowing. This aspect may need further clarification.

The tabling of the Bill adds weight to the industry's expectation that borrowing will continue to be available to superannuation funds, notwithstanding the reservations expressed recently by the Cooper Review Panel.

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