New Borrowing Rules

In September 2007, the legislation that had prohibited borrowings by super funds was amended to allow new borrowings to acquire assets, subject to some fairly strict rules. The legislation was further amended in July 2010.

The basic requirements are:

  1. Borrowings are only for new purchases. Asset involved can be any asset the fund is allowed to buy – shares, property, managed funds, etc.
  2. Any borrowing must be on a limited recourse basis. Only the asset being purchased with the borrowings can be secured. No other fund asset can be at risk.
  3. The asset must be the subject of a “limited recourse borrowing arrangement”, meaning it is held in trust until the borrowings are repaid in full.
  4. The borrowing arrangement is a form of “bare trust”, set up strictly for this one transaction.
  5. A custodian should be appointed to hold the asset until the borrowings are repaid. Usually this custodian is a company, set up especially for this purpose. Note that title of the asset is held in the name of the custodian as trustee for the borrowing trust. The super fund does not actually own the asset until borrowings are repaid.

The paperwork involved is substantial and complex. Legal advice is strongly recommended. Please note that there are usually substantial costs involved and the interest rate on these loans can be higher than housing-loan rates.

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