According to Townsends Business and Corporate Lawyers’ Elizabeth Wang, the goalposts for SMSF borrowing have moved, and SMSFs are “late in the second half”.
This is due to the Australian Prudential Regulation Authority’s changing standards.
She explained: “Acquiring property through an SMSF using borrowed money may be an attractive investment choice for many, however, with banks tightening their lending criteria on the insistence of APRA to curb investor borrowing, trustees need to ensure that the SMSF has sufficient funds to settle where an off-the-plan property has been purchased.”
Explaining that APRA has mandated that lenders require SMSFs to have at least 40 per cent of the property value as a deposit, in addition to a capacity to withstand higher interest rates, Ms Wang said buying an off-the-plan property comes with increased risks.
“One of the risks of purchasing with a mortgage is that if the lender’s final valuation comes in lower than the contracted price, trustees may be forced to make up the shortfall from the SMSF’s own funds, which could be an issue if the SMSF does not have sufficient funds.
“Trustees who may be contemplating purchasing off-the-plan should consider the liquidity of the fund to manage lower valuation or the demand for a lower loan-to-valuation ratio from the lender (from 80 per cent to 70 per cent).
“Trustees should also consider whether they have the capacity and ability to add funds to the SMSF without breaching the contribution caps.”
Additionally, she said trustees should also think about taking a loan out from a related party where the fund needs to make up the shortfall of the purchase price.
Legally, this type of loan needs to be at arm’s length. This means it will require security, like a mortgage over real property.
“It may also be necessary to consider whether there is a loan agreement in place already, in which case does the agreement allow for the terms to be varied?”
The government’s proposed changes could also make borrowing “more problematic”, Townsends’ special counsel superannuation, Michael Hallinan said.
“The government is proposing the introduction of new measures that will impact all Limited Recourse Borrowing Arrangements (LRBA), entered into on or after 1 July 2018.
“These measures, if enacted, will include a member’s share of any outstanding LRBA debt in the calculation of their total superannuation balance, which may have a flow-on effect on that member’s ability to make contributions, including catch-up contributions.”
With this in mind, he said clients considering a LRBA should think about making the jump sooner rather than later, to minimise the risk of being caught by new rules.
“Matters will be a little more complicated for off-the-plan purchases – as there is no drawdown of the loan until the property is close to completion – which may be in one or two years’ time.
“While at the moment there is no exception available for this type of transaction, the consultation paper does raise the possibility of transitional rules for LRBAs which straddle 1 July 2018.”