New measures governing limited recourse borrowing arrangements (LRBA) entered into on or after 1 July mean borrowing and many other aspects of running an SMSF may become more complicated prompting a call for trustee action now from an industry lawyer.
“These measures, if enacted, will include a member’s share of any outstanding LRBA debt in the calculation of their total super balance, which may have a flow-on effect on that member’s ability to make contributions, including catch up contributions,” Townsends Business and Corporate Lawyers special counsel superannuation Michael Hallinan said.
“While these measures may be modified or even not enacted, clients who are currently considering entering into an LRBA may see the benefit of making the jump and, ideally settle, before 30 June to minimise the risk of being caught.”
Hallinan said 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.
“This may be in one or two years’ time,” he said.
“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.”
Furthermore, changes to Australian Prudential Regulation Authority (APRA) standards have moved the goal posts for SMSFs borrowing to buy real estate, Townsends solicitor Elizabeth Wang has warned.
“Acquiring property through an SMSF using borrowed money has be an attractive 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,” Wang said.
“With APRA’s new measures being in force, banks are now requiring SMSFs to have at least 40 per cent of the value of the property as a deposit, in addition to the higher interest rates that banks are now charging.”
On top of this, many lenders are not approving finance for a fund that does not have at least $200,000 initially, and sufficient liquidity in the fund after the property has been purchased, Wang added.
“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,” she said.
“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.”
