Superannuation Update - August 2010

Government announces changes to the super fund borrowing rules and an extension of the draw down relief for account based pensions in 2010/11. 50% Reduction for Minimum Pension Payments Continues for 2010/11 The Government has announced that the draw down relief for account based pensions will be extended for the 2010/11 financial year.

This relief will apply in the same way as in 2008/09 and 2009/10,  ie, the minimum payment required to be withdrawn from your pension during 2010/11 will be 50% of the statutory minimum amount. 

We will notify you of your minimum pension payment for 2010/11 when we complete your super fund’s accounts for 2009/10. The payment is calculated as a percentage of your account balance as at 1 July 2010 according to the table below.

For example if you are 71 years old and your pension account balance is $525,000 at 1 July 2010 then your minimum payment for 2010/11 will be $26,250. You may withdraw more than this but at your option you may also reduce this payment by up to 50% and only withdraw $13,125. The pension payment must be withdrawn before 30 June 2011. 

Changes to Super Fund Borrowing Rules

New super fund borrowing rules were introduced last month to replace the existing rules that have been in place since September 2007.  This is good news as the new rules provide greater flexibility in borrowing arrangements and also clear up some previously unanswered questions.However the new rules also impose some significant restrictions on asset acquisitions so any proposed purchase must be carefully thought out so as to avoid being ‘stuck’ with an asset that the super fund cannot deal with as it wishes.

Since September 2007, super funds have been permitted to borrow to acquire an asset for the fund. The rules are strict about how the borrowing arrangement must be structured, in particular:

• The asset must be one in which the super fund is allowed to invest. Typically we see that real estate is the most popular under these arrangements - residential investment property or commercial property for use in the member’s own business being the two most popular investment objectives. 

• The loan security is limited to only the asset being purchased. That is, the lender has no recourse to any other assets in the super fund.  The lender may however request personal guarantees from members against their personal assets.

• The asset must be purchased on trust for the super fund.  That is, another entity must be structured to acquire the asset and hold it on trust for the super fund, typically until the property is sold or the loan has been repaid.   The super fund has a beneficial interest in the property which means that for all intents & purposes it owns the asset and therefore derives all income and pays all expenses.

The new rules introduced last month now allow a super fund to refinance its loan if need be. This is permitted provided that the new loan is used only to extinguish the old loan and meet any associated costs in taking out the new loan. It is important to note that this will then bring the arrangement under the new rules so care is required as this may have some detrimental consequences for the super fund.

However there is no scope to sell the asset and acquire a new asset under the same or refinanced facility.  A new borrowing arrangement is required.

It has also been made clear that a super fund may not borrow to improve an asset. This includes borrowing money to do a renovation or to construct a building on a property owned by the fund.  This restriction even extends to a super fund using its existing cash reserves to pay for the improvements. This will have significant implications for a property purchase where it is intended to renovate or extend the property at some stage and may mean that the acquisition needs to be structured differently.

Last week the ATO released a Q & A document about the new borrowing rules.  Click here to read these.

If you have any questions or would like to know more about either of these two topics please contact Stephen Rose or Sally Rorke on 02 9981 2300.

This information is general information only and is based on our interpretation of various topics. It has not been prepared taking into account your specific situation, objectives or needs. You should consider how the information is in anyway appropriate to your own situation before making any decision. You should also seek independent advice from the appropriate professional to assist you with any decision.

Back