APRA has written to ADI’s advising that for the purposes of APS 112 (Capital Adequacy), loans to SMSFs are to be treated as ‘non-standard’ eligible mortgages because SMSF loans may have a different and potentially higher loss profile in comparison to standard loans.
APRA’s letter emphasises that “where an ADI is extending credit to SMSFs, it is the ADI’s responsibility to ensure that it has given detailed consideration to the particular risks of lending to a superannuation fund, and that its application process verifies all relevant compliance matters that might impact on the ability of an SMSF to service the loan.”
What are the risks for lenders?
APRA identifies 3 risks: the security asset is held on trust for the borrower which has only a beneficial interest in the security asset, the lender’s rights are limited to the asset purchased with the loan and the lender is reliant on a guarantee by the owner of the asset.
The loan structure is dictated in part by the Supervision Industry (Supervision) Act 1993 (Cth) which provides amongst other things that SMSFs are legally permitted to borrow money only in limited circumstances (s67 SIS Act), the asset acquired is held on trust so that the fund trustee only acquires a beneficial interest in the asset and the rights of a lender are limited to the assets being acquired (s67A SIS Act).
The ATO has issued rulings on compliance with these provisions.
Separately, if the loan is to purchase or refinance a residential investment property and the SMSF Trustee is an individual, the loan will be regulated by the National Credit Code.
What are the NCC risks in respect of the guarantee?
If the borrower SMSF does not own the security asset the NCC provisions about third party mortgages and guarantees are relevant including:
1. Section 48 of the NCC prohibits a credit provider from taking third party mortgages if the mortgagor is an individual who is not a borrower or a guarantor.
2. Under section 60(5) of the NCC a guarantee by an individual is void to the extent it limits the guarantor’s right to indemnity from the borrower (but the SIS Act limits recourse to the security asset).
If the guarantor for a SMSF Loan and the mortgagor is a corporation (not a strata corporation) the NCC restrictions do not apply.
But the ATO requirements must be satisfied.
Bright Law can advise lenders on structuring loans to SMSFs.
