The concept of a ‘single acquirable asset’ in relation to the use of gearing in superannuation funds is potentially making this strategy impossible to implement in some states, according to the Small Independent Superannuation Funds Association (SISFA) technical committee chair Rob Jeremiah.
The problem arises when the asset to be purchased via the loan is real estate that is made up of two or more legal titles.
In these situations some trustees, namely those running self-managed superannuation funds, are taking out separate loans for each title and for each of the separate loans the lender’s recourse must be limited to the specific title associated with that loan.
In the latest SISFA newsletter Jeremiah said this means separate security documents must be drafted for each separate title. But in some states this arrangement is not possible.
“In Victoria it is not possible to register separate mortgages over separate titles if those titles are linked and cannot be dealt with separately. It is only possible to register a mortgage over both titles. This would breach section 67A of the SISA (Superannuation Industry Supervision Act) because this effectively leads to cross-security, that is, the two titles would both become security for each loan,” he explained.
“In practice parties are therefore not registering these security interests. While the execution of the security documentation provides the lender with an equitable mortgage (and it may be possible to lodge a caveat over both titles in order to provide some notice to third parties that there is a security interest in the property), this does not offer the same protection as a first registered mortgage.”
This set of circumstances could result trustees not being able to secure a borrowing facility from a commercial lender.
“This further demonstrates that the legal title or titles to a property do not determine whether the property is one or multiple ‘assets’. The term ‘asset’ as it is used in the SISA should be given an in substance interpretation (for example, by reference to accounting standards) and not a technical legal interpretation,” Jeremiah said.
