30/10/2018

With more small lending organisations offering limited recourse loans to self managed super funds, the borrowers and their advisers need to be sure the loans are compliant.

The ‘Big 4’ banks have ‘left the building’ when it comes to lending to self managed super funds. The reasons are far from clear.  It seems to be a knee-jerk reaction to the Banking Royal Commission, though exactly what was so awful about loans to super funds, no-one has ever been able to say clearly.

The most often given reason is ‘risk’ but the figures on default in such loans are no higher than any other lending areas and anyway the banks always obtained member guarantees so what’s the problem?

It is possible that APRA and ASIC have put pressure on them for non-transparent reasons associated with the government’s desire to limit them for political reasons … but that may just be another conspiracy theory.

Whatever the reason, there is little point in approaching a Big 4 bank for a loan to an SMSF.  The members can borrow personally using their non-super assets as security and then on-lend to the fund, but depending on the age of the member, this might cause problems with total super balance calculations with the unpaid amount of the loan being included.

But there are still plenty of lenders out there prepared to lend to self managed funds.  They are what’s called in the industry ‘second tier lenders’.

Unlike the Big 4 these lenders don’t seem spooked by the unfounded allegations of greater risk with loans to SMSFs.  And their money is the same colour as everyone else’s.  The only thing these lenders may lack is experience in lending to super funds.  That’s where the fund has to be careful.

Limited recourse loans to self managed funds are highly technical products that require a material understanding of the major compliance issues.  Foremost among these is that the property being given as security must be held by a holding trustee on behalf of the fund rather than the fund trustee itself.  In addition, if the borrower defaults the lender can only have access to that secured property and can’t access the fund’s other assets.

These two major characteristics (and a lot of flow-on minor issues, like who buys the property at the auction, who pays the stamp duty on the purchase and so on) mean that the lender’s documents need to be specific to a limited recourse loan.

Any SMSF which wants to borrow must get the right advice to ensure that all the documents that make up the compliance pack for the transaction are appropriate and in accordance with the law.

Don’t assume that the documents provided by a second tier lender with limited experience in these sorts of loans will get it right – they may not.

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