New Gearing Laws

The Government has introduced a Bill to amend the current limited recourse borrowing exception.

The general rule is that regulated superannuation funds cannot borrow.  There are a number of exceptions to the general rule.  The main exceptions are short term borrowing to pay benefits and limited recourse investment borrowings.

If the Bill is enacted (and assuming that there are no material changes introduced into the Bill during its passage through Parliament) the changes will generally be favourable.

The first change will be that the limited recourse borrowing exception will be set out in new s67A rather than as s67(4A).

The second change is that the new section 67A removes any doubt that the borrowing must be for a single acquirable asset.  The current provision can be read as either relating to a single asset or a number of different assets acquired at the same time.  There is an exception to the single acquirable asset rule – this is discussed later.

An acquirable asset is the new term used to refer to any asset which the trustee could acquire on an ungeared basis.  If the trustee could not acquire an asset on an ungeared basis (eg because it is personal property of a member of the fund) then the trustee cannot acquire that asset on a geared basis using the limited recourse borrowing exception.

The third change is that the borrowed money can be applied not only in the purchase price of the asset but also used to pay the direct transaction costs of the acquisition (eg conveyancing fees, stamp duty, brokerage and loan establishment costs).  Also, the borrowed money could be used to maintain the asset (cleaning expenses) and repairing the asset (eg electrical, plumbing or painting expenses).  However, the borrowed money could not be used to improve the acquired asset. 

The fourth change is that the borrowed money could be used to pay out the original loan used to acquire the asset and any accrued interest on the original borrowing.  In short, the amended legislation will permit limited recourse borrowings to be refinanced.

The fifth change is that guarantees provided to the lender will be permitted so long as the guarantor has no better rights against the borrower super fund than the lender had.

The exception to the “single acquirable asset” is that a collection of assets will be treated as a single asset if the assets in the collection have the same market value and are identical.  The Bill gives the example of shares of the same company which are of the same class.  Another example would be units in the same unit trust which confer the same rights.

In conclusion, this Bill is most welcome and will greatly enhance the certainty of real estate supergearing.  However, the Bill does prevent super gearing being used to acquire a bundle of different securities.  To this extent the Bill could be improved.