A technical expert has identified a significant issue trustees of SMSFs may face in seeking relief from limited recourse borrowing arrangement (LRBA) repayments stemming from financial adversity caused by the coronavirus pandemic.
During the latest Accuirum technical webinar, SMSF specialist adviser Mark Ellem revealed the problem is associated with the Australian Banking Association (ABA) COVID-19 Commercial Landlord Relief Package and as such is likely to affect SMSF landlords the most.
The ABA package includes a six-month deferral of loan repayments and stipulates interest will continue to be charged and an increase in capital repayments or extension of the loan term will occur once the relief period is over.
“[One of the issues to come] out of this is that code is for members of the ABA. Now we’ve had a lot of banks over the years pull out of offering products in the LRBA market and they’ve been replaced by other lenders that are not necessarily members of [the ABA] or subject to the Australian Banking Association code,” Ellem said.
“I’ve heard some stories where the SMSF has borrowed from an arm’s-length, unrelated commercial lender, but as they’re not a bank or a member of the Australian Banking Association, then no relief is being provided and they’re saying they don’t need to because they’re not a part of the Australian Banking Association.
“That then puts the SMSF in a precarious situation where they have to continue to meet the loan repayments that were in place pre-COVID-19 or look at potential refinancing, which obviously will be difficult in this market considering the [fewer] number of lending products that are currently available.”
He pointed out this could result in cash-flow problems for SMSFs that have granted rent relief to tenants of a property held in the fund acquired through an LRBA, with trustees receiving reduced or no income but still experiencing outflows in the form of loan repayments.
