What Rate of Interest Should a Fund Charge on In-house Asset Loans?
There is no established rate of interest chargeable on loans which are in-house assets, however there is a general requirement under Section 109 of the Superannuation Industry (Supervision) Act 1993 that all dealings with related parties be effected at arm’s length and on arm’s length terms. Therefore, any such loans should not be made where the borrower is so uncreditworthy that an independent organisation would not loan them the money. Also, any loans should be properly documented. As to the interest rate, that is determined by the borrower’s characteristics. If there are no special problems with the borrower and the amount concerned is not large, then the same rate as a bank would charge on an overdraft would seem to be appropriate (a super fund can take security over the borrower’s assets in the same way as a bank, which can reduce the interest rate).
It is important to note that we are talking about in-house loans valued at less than 5% of the market value of the fund’s assets – ie. in-house assets which are within the limit allowed by the law. Under no circumstances can a fund borrow more than this, or they are in breach of the operating standards. However, in the event that they do breach the standards in this way, they would still need to pay interest on the outstanding amount, in accordance with the above guidelines.
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