Frequently asked questions on Self-Managed Super Funds

Traditionally, an “instalment Warrant” now referred to as a “Limited Recourse Loan” is a marketed investment product that enables the investor to acquire an asset, normally listed securities or real estate. This is achieved through the investor paying an initial deposit then borrowing money to fund the remaining amount required to acquire the asset. The borrowing is repaid by the investor making further instalment payments, i.e. a home loan.

The investor purchases the asset that provides an income, i.e. rent or dividends. The investor’s interest in the asset is provided as security for the borrowing. If the investor defaults on the borrowing, the lender may only have recourse to the asset acquired. The lender has no recourse to any other asset of the investor. In simple terms, the funder, usually a bank only has access to the secured asset to extinguish the loan. They cannot touch any other asset belonging to the borrower.

Why has the law changed? 

Previously, super funds were not allowed to borrow money to purchase an asset.

From September 2007, changes to the law meant that super funds were permitted to borrow money to purchase an asset, providing that certain requirements are strictly met.

Do the new rules apply only to Self-Managed Superannuation Funds (SMSFs)?  

No. The new laws apply to all regulated funds, not just SMSFs.

Is it only marketed “Limited Recourse Loan” products which are allowable under the new laws? 

No. The new laws are not limited to only allowing traditional tradable “Limited Recourse Loan” products as a means of a super fund borrowing money to acquire an asset.

Such a borrowing may be permitted under any “Limited Recourse Loan” type arrangement which is structured and carried out in a way such that it satisfies all of the requirements of the new law, i.e. SMSF’s can now borrow money to purchase residential real estate, however there are rules governing such a purpose.

What conditions must be met for borrowing to be allowable? 

Under the new law a super fund is not prohibited from borrowing money, providing the arrangement entered into satisfy each of the following conditions:

• The borrowed monies are used to acquire an asset which the fund is not otherwise prohibited from acquiring.
• The asset acquired is held on trust so that the fund receives a beneficial interest in the asset.
• The super fund has the right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest.
• Any recourse that the lender has under the arrangement against the super fund is limited to rights relating to the asset acquired. That is, the lender is able to have the right to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired, but cannot have the right to recover such monies through recourse to the fund’s other assets.

What are the consequences if the “Limited Recourse Loan” arrangement does not satisfy all of the required conditions?

If the required conditions are not strictly satisfied, borrowing money under a “Limited Recourse Loan” type arrangement will result in a breach of one or more of the super laws. Such a breach may have civil or criminal consequences.

Is a fund trustee allowed to acquire the underlying asset from a related party vendor?

The laws which prohibit the acquisition of assets from related parties apply to “Limited Recourse Loan” type arrangements.

However, the exceptions provided for in the rules against acquisition of assets from related parties, such as those allowing for the market value acquisition of listed securities or business real property, continue to apply.