Loans and liabilities against assets 108-04020040

Where there is a small change to asset values determine whether the customer is required to notify.

The value of the excess of assets over liabilities represents the asset's net value. Sections 1121 and 1121A of the Social Security Act 1991, allow the deduction of liabilities owed by a customer to determine the asset's net assessable value. This also applies to assets held by a business entity. Section 1121 refers to the amount of a charge or an encumbrance over a particular asset. Generally the value of a secured loan is to be deducted from the asset against which it is secured.

Generally, all liabilities on the balance sheet of a sole trader or partnership can be deducted from the value of assets owned by the business to determine the assessable value of the business, even if secured over non-business assets.

Each type of business structure has specific guidelines regarding treatment of secured liabilities. There are some qualifications and secured liabilities exceptions to the general rule.

The assets of a private trust or private company are assessed by a Complex Assessment Officer (CAO), who determines the recognition of the liabilities and the level of net assets attributed to a customer depending on their level of control. For example if a customer is a 100% controller of a private trust that has net assets of $200,000, the $200,000 is attributed to the customer and included with their assets for the Assets Test.

There are, however exceptions, even for secured liabilities. A charge or encumbrance cannot be deducted from the value of an asset if:

• it is for the benefit of a person other than the customer or the customer's partner
• it is a collateral security, or
• the asset it is secured against is disregarded under section 1118 of the Social Security Act 1991 (for example the customer's principal home)

If a company or trust liability is secured against an asset owned by a customer, the amount of the liability that may be deducted from the value of the asset provided as security is limited by the customer’s attribution of the entity’s assets

The value of the trust or company liability secured against a personally held asset, can only reduce the value of the asset to the extent that the customer (and/or their partner) is a controller of the trust or company. For example, if the customer was a 50% controller of a private company, only 50% of the secured liability can be deducted from the value of the personally owned asset used as security. This is because the other 50% of the money borrowed was to the benefit of the other attributed controller of the company or trust.

A margin loan is a loan that use shares and managed investments as security for borrowing. This type of borrowing is also known as 'gearing'. The individual shares and managed investments are not recorded as separate items. Details of the current market value of the portfolio and the current loan balance are obtained from statements issued by the lender. The current loan balance is not usually the loan limit amount. The loan limit amount is the maximum the investor can borrow against the portfolio and is usually shown on the statements.

Under the Assets Test, the value of the customer's asset is reduced by the value of the encumbrance over that asset (that is current market value less the loan balance). Under the Income Test, the gross current market value is used to calculate deemed income. Margin loans are reviewed in March and September. These investment portfolios are updated in the MIN system.

If a customer has an unsecured loan and provides evidence (e.g., credit card statement) the loan was specifically obtained to purchase the asset, including financial investments, the outstanding loan amount is deducted from the value of the asset. Although reduced for the asset test, deeming will however still apply to the gross value of any financial investments. Note: the value of an asset-tested income stream cannot be reduced by the amount of an unsecured loan.

A charge on an asset under section 189AB of the Bankruptcy Act 1966, is a 'charge or encumbrance' for the purpose of section 1121 of Social Security Act. When determining the value of a customer's asset, it is to be reduced by the amount of the 'charge or encumbrance' imposed under the Bankruptcy Act 1966.

A line of credit is a loan secured against a customer's asset, usually the principal home. The approved funds are available to the customer to access. For social security purposes, only an account with a positive balance can be assessed as an asset.

Typically a line of credit account has a negative or zero balance and is not an assessable asset.

The asset value of any items purchased (for example motor vehicle, boat) cannot be reduced, if the funds used to purchase them are secured against another asset.

A redraw facility is not an asset. Therefore, they are not recorded on the customer's record.

Credit cards with a negative balance that is not drawn to the maximum borrowing limit is not an asset. For Social Security purposes, only a credit card or an account with a positive balance can be assessed as an asset.

The asset value of any items purchased (for example motor vehicle, boat) cannot be reduced, if the funds used to purchase them are secured against another asset.