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The Adviser explores the current legislation surrounding self-managed super fund lending
Self-managed super fund (SMSF) lending is a highly complex and highly regulated field. In recent years, changes to legislation have made borrowing through SMSFs highly attractive for many, but it remains a minefield of rules and regulations that brokers must carefully navigate when writing SMSF loans.
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The Adviser spoke with Peter Burgess, head of policy and technical at AMP SMSF, to provide brokers with some guidance. Mr Burgess says when discussing SMSFs, it is vital to know exactly what you can and cannot advise on.
Who can provide advice?
A self-managed super fund is a financial product and therefore only a licensed planner, or an accountant operating under the licensing exemption, can provide advice about the creation of an SMSF.
Mr Burgess says brokers must keep this in mind when talking to clients about SMSF lending and limited recourse borrowing arrangements (LRBAs).
“Brokers need to be very careful not to make any representations or a statement of opinion that could be construed to be financial product advice,” he says.
“ASIC has taken a very broad stance on this and has stated that where an investment is made through an SMSF – for example, where a property is acquired under an LRBA – the person who provides that advice is required to be licensed because an SMSF is a financial product.
“So given all the attention around LRBAs, it’s very important that brokers and others who may be providing property advice as part of an LRBA understand the financial services laws around providing financial product advice.”
According to Mr Burgess, individuals who are licensed to provide financial product advice must satisfy the minimum training standards set out in RG 146.
Advisers can meet the training standards by satisfactorily completing training courses listed on the Australian Securities and Investments Commission (ASIC) training register relevant to their advisory activities, or experienced advisers can demonstrate their competence through individual assessment.
The rules of borrowing
In 2007, the legislation around SMSFs was amended to allow super funds, including SMSFs, to borrow money to purchase assets under limited recourse conditions. This means in the event of borrower default, the lender only has the right to recover losses from these assets.
Prior to this change in the legislation, super funds were only permitted to borrow to overcome short-term cash- cow issues.
Mr Burgess says the rule change allowed SMSFs greater flexibility and the financial means to invest in property. However, there are restrictions that must be abided by.
“ The requirement that it must be a single asset, and the restrictions around replacing the asset, impose some restrictions on the types of properties that can be acquired or are suitable for an LRBA,” says Mr Burgess.
Unless one of the limited exceptions applies, the property must comprise a single legal title and once the asset has been acquired and the loan remains in place, it is not possible to make alterations to the property if the alterations would have the effect of changing the function or character of the property.
“ This restricts the investment opportunities open to SMSFs, as property development is not possible – nor are house and land packages under a single LRBA where progressive payments and multiple drawdowns from the loan are required during the construction of the premises,” says Mr Burgess.
Last year, the Australian Taxation Office (ATO) issued the ruling SMSFR 2012/1 in which it clarified exactly what is an ‘acquirable asset’ and a ‘single acquirable asset’, when is the asset maintained or repaired and when is it improved, and whether improvements or alterations result in a different (replacement) asset.
Mr Burgess says brokers should make themselves aware of these rulings, as they have practical implications for brokers and their clients.
According to Mr Burgess, it is also useful for brokers to be aware of a decision handed down by the ATO at the National Tax Liaison Group (NTLG) Superannuation Technical subgroup meeting in December 2012: that drawdowns from the loan to cover the cost of repairs and maintenance will only be permitted under an LRBA if the terms of the original loan specifically provided for the drawdowns.
“Therefore, in order for clients to have the flexibility to make drawdowns from the loan to cover the cost of property repairs and maintenance, it is important the loan is set up that way from the outset – and brokers can play a key role here,” he says.
Looking forward, Mr Burgess says there has been some speculation the rules around related party loans will be tightened. However, it is unclear if and when this might happen.
Treasury also released draft amendments to the Corporations Regulations in February last year, which aim to bring an LRBA within the definition of a financial product.
“If these amendments are passed, it would have the effect of requiring all parties associated with the LRBA to be appropriately licensed. It is unclear whether the government will be proceeding with these amendments, or some variation of these amendments,” says Mr Burgess.
