LRBAs, guarantees in need of review after property market falls
With property markets taking a tumble in recent times, some SMSF clients may need to review the loan arrangements and guarantees they have, particularly where the loan-to-value ratio has significantly dropped, says an industry lawyer.
Speaking in a seminar in Sydney, DBA Lawyers director Daniel Butler said the property market has been under some stress recently, and while it may see a bit of a rebound with Labor’s property tax changes off the table, some SMSFs may be impacted by the recent fall in property values.
Mr Butler said the ATO has previously raised concerns about the amount of property loans held by SMSFs and guaranteed by assets outside of super such as the family home.
“If the market collapses, this is going to affect retirement savings and personal assets,” Mr Butler said.
Mr Butler explained that there were two types of guarantees: unsecured guarantees and secured guarantees.
“We have noticed a movement out there, typically with non-bank institutions, that they want that guarantee to be supported by a security or a charge or mortgage over the home or property owned by that guarantor,” he said.
While the fact that it is a limited recourse loan means that the security including any related guarantees should be limited to the value of the acquirable asset, but often they are not.
“You have to read and check it. I read one the other day that said that any asset you hold on trust is also up for grabs. Some of them also say, well, if it’s interest and cost and damages, we can also claim that back, even default interest,” he said.
SMSF professionals and their clients need to be very mindful of the extent of these guarantees, he cautioned, particularly if the client is entering negative equity.
The documents that deal with the guarantee for the loan arrangements may need to be reviewed for those clients who are in that risk category, he advised.
“That would be those that bought an apartment and it’s now close to negativity equity and the they’re getting light on the loan-to-value ratio (LVR) because the property value has sunk but the loan is still there and they’re no longer over their 70 per cent threshold,” he said.
This also needs to be looked at with related-party loans, because if the LVR is no longer under the 70 per cent, then they may need to restructure.
SMSF practitioners should offset their liability by encouraging their clients to get these documents reviewed.
Miranda Brownlee
22 May 2019
smsfadviser.com