Replacement by way of improvement

Now that the limited recourse borrowing arrangements have passed both houses, and we await Royal Assent, our minds turn to what the changes mean for superannuation funds now wanting to borrow.

The EM to the Bill suggests that "the replacement by way of improvement of real property" will give rise to a replacement asset, that will not be permitted under the new regime.  This is curious in a number or respects:

• where in the Act does it say that an improvement of real property gives rise to a replacement asset - perhaps there are regulations yet to be promulgated;
• if there is no change to the title, it is difficult to see how there has been any change to cause the acquirable asset to change to a replacement asset;
• what degree of change is necessary to cause an improvement (no doubt the issue of repair vs improvement will come to the fore).  What about watering the lawn - is that an improvement?
• and what mischief is this designed to address - presumably to prevent development occurring, but what about relatively minor improvements aimed at enhancing the value of the property?

And finally, what if the superannuation fund uses its own money rather than borrowed money to undertake the improvement.  After all, the restrictions in the new provisions are all about the way in which the money borrowed is applied, rather than other funds made available from the superannuation fund.

Single acquirable asset

The bill introduced into parliament last week proposing amendments to the superannuation borrowing exemptions is, for the most part, welcome confirmation that limited recourse borrowing arrangements are here for the foreseeable future.

However, one concern with the proposed changes is the restriction of these arrangements to 'single acquirable assets' and collections of identical assets with the same market value, particularly in the context of real property.  It would seem from reading the bill and the EM that where, say, a residential house is constructed over 2 lots, each lot will be a single acquirable asset, and the property would have to be held in 2 trusts, with separate loans for each lot.  And this appears to be so, even if the lots are on one title.  Similarly, a fund that wanted to borrow to acquire a strata-titled commercial building would have to have a separate trust and separate borrowing for each lot, despite the lots together comprising the building that the fund wished to acquire.

Ideally, the legislation should recognise that assets with a single use would comprise a single acquirable asset.

It will be interesting to see whether financiers will be willing to enter into arrangements involving multiple loans and multiple trusts to fund what in essence is the acquisition of a single asset that just happens to comprise multiple lots.