|
|
|
|
|
This topic discusses:
The value of an asset is reduced by the amount of any outstanding charge or encumbrance over the asset.
Exception: A charge or encumbrance CANNOT be deducted from the value of an asset if:
A charge or encumbrance for the benefit of a third party or a collateral security, are sometimes called excluded securities. A collateral security is a secondary agreement, supported by money or property, which is ADDITIONAL to the principal security for the same loan.
Example: A customer's son borrows money for his business, secured against an investment property owned by the customer. The charge or encumbrance against the investment property IS for the benefit of a person other than the customer or their partner (in this case the customer's son benefits). The value of the investment property is NOT reduced by the amount of the charge.
Example: A customer borrows money to buy a block of land. The lender secures the borrowing by a charge over the land. In addition the lender secures the borrowing against an insurance policy owned by the customer. The charge over the insurance policy is a collateral security. The value of the insurance policy is NOT reduced by the amount of the charge.
Act reference: SSAct section 1121 Effect of charge or encumbrance on value of assets
If a customer has an unsecured loan AND provides evidence that the loan was specifically obtained to purchase the asset, the outstanding amount of the loan IS deducted from the value of the asset.
Exception: The value of an asset tested income stream CANNOT be reduced by the amount of an unsecured loan.
If a charge or encumbrance is secured against both an asset that is disregarded under section 1118 of the Act AND an assessable asset, the amount of the outstanding charge or encumbrance is shared between the assets in proportion to the asset values. The formula for this is set out in sub-section 1121(4) of the Act:
Example: A customer has a charge of $100,000 secured against both their farm and principal home. The value of the farm is $180,000 and the value of the principal home is $60,000. The gross value of the farm and principal home combined is $240,000.
($100,000 X $180,000)/$240,000=$75,000
This means the net asset value of the farm is $105,000 ($180,000 MINUS $75,000)
Primary production assets and liabilities ARE aggregated.
Example: Customer owns farmland worth $200,000. A mortgage of $50,000 is secured against the land. The customer runs the farm in partnership with his son. The partnership owns plant, stock and machinery to the value of $100,000. The partnership has liabilities of $150,000. The customer has:
Total assets of $250,000 MINUS total liabilities of $125,000 = net primary production assets of $125,000.
Act reference: SSAct section 1121A Effect of certain liabilities on value of assets used in primary production
_______________________________________________________
Last reviewed: 1 March 2004
