26/04/2018

Changes to APRA standards have moved the goal posts for SMSFs borrowing to buy real estate. The problem is we’re late in the second half.           Elizabeth Wang reports.

Acquiring property through a SMSF using borrowed money may be an attractive investment choice for many, however, with banks tightening their lending criteria on the insistence of The Australian Prudential Regulation Authority (APRA) to curb investor borrowing, trustee/s need to ensure that the SMSF has sufficient funds to settle where an off-the-plan property has been purchased.

With APRA's new measures being in force, banks are now requiring SMSFs to have at least 40% 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.

So what does this means for trustees who have thought they could borrow money to purchase an off-the-plan property? For starters 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 percent 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.

Trustees may also wish to consider taking out a loan from a related party (i.e. a loan from a member of the SMSF) where the fund needs to make up the shortfall of the purchase price on settlement. Legislative requirements require this type of loan to be at arm’s length which will require security such as a mortgage over real property registered with the relevant State’s land titles office.

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?  

Section 109 of the Superannuation Industry (Supervision) Act 1993 requires related parties to deal at arm’s length with each other.  Would a commercial lender such as a bank allow the terms of the loan to be varied by trustee/s minutes? What terms should be inserted?  Will you go with the so-called ‘safe harbour’ terms or do you have evidence of more advantageous terms in the market that the fund can make use of?

As the loan terms must apply for the whole year, does the fund have enough money to pay additional interest for that period?

Also whether the trustee/s need:

•    to understand their obligations more completely;
•    to document and confirm a previous loan;
•    to vary the terms of a current loan;
•    to have a mortgage prepared;
•    to get help implementing any of the changes or new documents including registering a loan variation,

contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au to see how we can assist.