Will it get harder for self-managed super funds to borrow?
It is already getting trickier on a number of levels.
For starters, the Australian Prudential and Regulation Authority (APRA) crackdown on investor lending has already made it tougher for self-managed super funds to borrow, says Elizabeth Wang, solicitor at Townsends Business & Corporate Lawyers.
As fund borrowings are regarded as investor loans, banks have toughened their lending criteria.
Wang says banks are now asking self-managed super funds to have at least 40% of the property’s value as a deposit and have increased their interest rates on these loans.
She says many lenders are also refusing to approve finance if a fund does not have at least $200,000 in assets already, and sufficient liquidity once the property has been purchased.
The government is also proposing legislation to include the fund’s borrowings in a member’s total super balance when calculating their eligibility to make non-concessional contributions.
Problems for members
Philip La Greca, executive manager for SMSF technical and strategic solutions at SuperConcepts, says that while this legislation has not yet been tabled, it would cause problems for many fund members who were relying on making contributions before retirement to pay off the debt.
Some may need to reconsider the viability of borrowing.
Under the new caps that apply this financial year, you can no longer make non-concessional (or after-tax) contributions if your super balance is more than $1.6 million.
The cap is reduced if your balance is between $1.4 million and $1.6 million.
The proposed legislation would include borrowings in that balance. It would also see them included in the transfer balance cap, which limits the amount that can be rolled over into a pension on retirement.
La Greca says the legislation has been devised to stop people from pulling money out of super and lending it back as well as making further contributions. But he says most self-managed super funds with borrowings are in the accumulation phase where members can’t make withdrawals anyway.
Instead, the legislation is likely to catch fund members who borrow believing they will be able to make large non-concessional contributions before retirement to pay off their debt.
Michael Hallinan, Townsends’ special counsel for superannuation, says the legislation would apply to new loans made from July 1 this year, which would allow existing fund members more latitude. But funds considering taking out a loan after that date need to consider how it will affect their repayment plans.
The problem, says La Greca, is that people who may be well under the $1.4 million limit could easily find themselves nudging towards it if they borrowed to buy a property and the loan was included.
“It’s counter-intuitive in a way, because it is saying the amount of super you have includes what the fund owes.”
La Greca says members caught by the proposed legislation may have to take longer to pay off their loans, potentially running into the retirement phase, selling the property before retirement (which may not bring the best return if markets fall), or adopt other strategies such as bringing new members into the fund.
Off the plan
The situation gets more complex if your fund is considering (or has committed to buy) a property off the plan. Hallinan says that even if you have already committed to buy the property, the loan is not drawn down until the property is close to completion, which may be after the proposed legislation is passed.
He says there is currently no exemption proposed for off-the-plan purchases that have already been entered into, though this may change.
An added complication, says Wang, is that tighter lending standards by the banks (and they could be tightened further as a result of the royal commission) raises the risk that lenders may require higher loan-to-valuation ratios, or value the property at less than the purchase price, by the time the loan is needed.
If the fund does not have the liquidity to pay any shortfall, trustees may be unable to make up the difference through contributions under the new caps. La Greca says members are allowed to lend the fund money for new property purchases but the rules are quite restrictive and complicated.
He says if the legislation is passed as proposed, self-managed super funds will have to ask whether loan arrangements are self-funding, as the capacity to put extra money into the fund could be limited.
“But that’s not necessarily a bad thing,” he says. “If the arrangement doesn’t stack up you’d have to ask why you’re doing it.”