In 2007 superannuation laws were relaxed to allow superannuation funds (“Super Funds”) to borrow money to acquire assets.
At about the same time, a Global Financial Crisis happened. This resulted in there being very little use of these new laws by Super Funds for a few years but with the return of business confidence that changed . It is now very common for Super Funds to borrow, particularly to purchase real estate.
The rules for borrowing by Super Funds are complex but became well understood by financiers and advisors such as financial planners, accountants and solicitors who practiced in the superannuation area.
Advisors soon realized that –
- The rules did not require that the lender to the superannuation fund be an external bank ; and
- In many cases, it was more cost effective and convenient to bypass external lenders and use internal arrangements with members or associates of the Super Fund who had money available to them to lend.
These internal arrangements were often “win-win” in that they often delivered to the lender a better return than would otherwise be obtained from leaving the money in its bank account and from the borrower’s perspective, avoided some of the costs and frequent delays associated with external arrangements.
In September last year the ATO issued two interpretive decisions that signaled the possibility of assessing the income received by Super Funds from the assets acquired under these sorts of arrangements with penalty tax rates if the ATO considered that the internal loan was not on ‘arm’s length terms’.
The most recent ATO announcement was earlier this month with the issue of what is called a practical compliance guideline (“PSG”). In this document, the ATO sets out its view as to what would be accepted by it as an arm’s length arrangement with regard to loan conditions, including:
- Interest rate
- Term of the loan
- The loan to valuation ratio
- The security taken for the loan
- Repayments
- Documentation
The PSG is a surprising document. It would have been expected that the ATO measuring stick would have been the normal requirements of external lenders however in a number of significant respects it is more restrictive than that. One could be forgiven for thinking that the ATO policy was to actively discourage internal funding arrangements rather to provide “practical guidance” in any meaningful respect.
The PSG is not legally binding. It is simply an ATO policy document however it would be prudent to review any existing Super Fund internal loan arrangements and make specific decisions whether to restructure or not.
At Everingham Solomons, we have the legal expertise to work with your financial advisors to review these types of arrangements because Helping You is Our Business.
See articles written by Ken Sorrenson