Technical Question – Limited Recourse Borrowing

Is it possible to borrow to pay the GST on a Property Acquisition?

Assuming the relevant legislative requirements for a limited recourse borrowing arrangement are otherwise satisfied, can the trustee borrow simply to pay the GST on the acquisition of the single acquirable property?

Consider this situation.  A self managed superannuation fund intends to purchase a commercial property for $880,000.  This price is the GST inclusive price.  However, the trustee believes that the going concern exception will apply to the sale so the super fund needs only to pay $800,000.  The trustee applies for a loan of $300,000 and will pay the balance of $500,000 (plus transfer duty, legal fees and registration and PEXA fees) from the fund.  So far so good.

However, the trustee shortly before settlement realises the going concern exemption will not apply (for whatever reason) and so that on settlement the trustee will have to pay $580,000 rather than the originally expected $500,000.

Can the trustee borrow $80,000 to pay the GST?  It seems yes. 

But as GST is not an added on element to the cost – as a tip is added to a restaurant bill – it is embedded in the contract price.  So, the situation is that the Trustee thought he was buying the property for $800,000 but is, in fact, buying the property for $880,000.  So, while the trustee may think the extra borrowing is to pay the GST – really the extra borrowing is required to make good, the shortfall in the settlement monies.

So, the answer seems to be yes, to the technical question.  But there are practical issues.

First, a willing lender must be found for the $80,000 loan.  Second the lender of the $500,000 will have to consent to a second loan and mortgage (as usually, the terms of the loan require the lender to consent to any second borrowing or consent to a second mortgage).  Finally, the lender of the $80,000 will usually charge a higher interest rate given the secondary status of the security.