Understanding the relevant SMSF rules and regulations is one of the most important tasks for brokers targeting the sector
By now, most brokers are well and truly accustomed to dealing with legislation and regulations that govern what they do and how they do it.
The National Consumer Credit Protection Act 2009 (NCCP) has been described as both a burden and a blessing. On the one hand, it has increased brokers’ workloads; on the other hand, many believe the legislation has made the industry more professional and improved its standing in the eyes of the public.
But for brokers eyeing a move into self-managed super fund (SMSF) lending, there is now even more legislation to contend with.
Industry experts warn that even though brokers have become accustomed to dealing with NCCP, they still need to familiarise themselves with the laws covering SMSF lending before jumping in.
Brokers, of course, aren’t the only ones involved in SMSF lending. Borrowers will also need to consult a lawyer and an accountant or financial planner. But there are still some areas where brokers may unwittingly cross the line.
Problem area 1: type of property
Graeme Colley, director of education and professional standards at the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), says brokers and customers alike should know which types of property can legally be purchased using an SMSF.
Peter Burgess, AMP SMSF head of policy and technical, says one of the biggest mistakes brokers make when writing SMSF loans is failing to understand the regulations:
“There are rules around making sure that just a single asset is purchased. This is important and brokers should have a general understanding of these rules,” Mr Burgess says.
This can get complicated when a property cuts across more than one legal title.
“Farms are a good example of this,” he says. “They normally comprise numerous different legal titles. So under the SMSF borrowing rules, you’d have to have a separate borrowing arrangement in place for each one of those.”
Rules, however, can have exceptions.
“If there is a physical structure that has been built across the titles, which means they can’t be sold separately, then the rules are different again,” he says.
For example, sub-divisions generally aren’t permitted within an SMSF, according to Gadens Lawyers’ partner Amber Warren.
“People also need to be aware that with residential properties, related party transfers are prohibited,” she says. “So usually, mum and dad can’t sell a residential investment that they’ve heldin their own names to the super fund.”
Problem area 2: giving advice
Many brokers already facilitate their customers’ getting an SMSF loan. Giving advice around the SMSF itself, however, is an area in which brokers need to tread carefully.
SPAA’s Mr Colley cautions that brokers are not permitted to give advice on the SMSF unless they are also licensed financial planners.
So how can a broker avoid crossing the line into this area but still provide their client with all the relevant information and ensure they are making an appropriate investment?
“Brokers should engage a financial planner early in the piece to help their SMSF clients,” says Mr Burgess. “A financial planner can talk to a client about cash flow issues. They can also make sure that the fund’s investment strategy is appropriate for this type of transaction.”
Any broker aiming to move into this sector would therefore do well to have strong and reciprocal referral relationships with lawyers and financial planners or accountants.
Macquarie’s senior product manager – SMSFs, Richard Chesworth, says that even though brokers are limited in terms of the advice they can provide, they still have an important role to play for their clients.
“Brokers can’t provide advice, but that doesn’t mean they can’t still ask questions and get their clients to really think about whether buying a property within their SMSF and taking out a loan to do so is right for them,” he says.
Andrea Slattery, CEO of SPAA, says some brokers don’t understand the laws around superannuation and SMSF lending, which is bad both for borrower and broker.
“The problem with [some] mortgage brokers ... is that they know what they know about their area, but they don’t understand the laws around superannuation and around other areas of legislation that may actually impact on providing advice on super,” Ms Slattery says.
“They also may not be aware of other circumstances within the fund ... that they need to understand to be able to introduce a loan into the fund in the first place.” Ms Slattery recommends brokers get as much education in the sector as possible as well as partnering up with other qualified professionals.
Problem area 3: ATO or ASIC?
When brokers are dealing with SMSF loans, they should be aware that two regulators are involved: the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).
The ATO is responsible for ensuring that super funds comply with the Superannuation Industry (Supervision) Act (1993).
“That means dealing with contributions and making sure that any acquisitions of property, or any limited recourse borrowings, are compliant within the Act,” says Ms Warren. “ There are also significant tax imposts if the fund becomes non-compliant.”
ASIC’s responsibilities include ensuring that corporate trustees (either the superfund or the property trustee) areproperly incorporated, have the appropriate directors and lodge their annual returns.
Be alert, not alarmed
According to Ms Warren, despite the complexities, brokers should not be intimidated into not writing SMSF loans.
Instead, they should ensure they remain informed and partner with professionals who can assist them in delivering the best results for their clients.
Mr Burgess says that even though it may be time consuming to acquire new referral partners and to absorb the intricacies of additional legislation – it will be worth the effort in the long run.
“It can be quite costly to get these arrangements wrong. The regulators are having a closer look at this – so people need to be educated, as well as being aware of the risks and the benefits of SMSF lending.”
Q & A: AMBER WARREN, PARTNER, GADENS LAWYERS
The laws that govern superannuation and SMSF lending are complex and so the more brokers know, the more likely they are to be successful in this space
What are some of the key legislative requirements of which brokers might not be aware?
With a self-managed super fund loan, the Superannuation Industry (Supervision) Act (1993) requires the loan to be a limited recourse loan. That means the lender will only have recourse to the particular asset that is being acquired using the loan.
What are some of the requirements for purchasing a property with an SMSF loan?
Brokers need to make sure the asset that’s being purchased by the super fund fits within the Act. The Act requires the SMSF to purchase only a single acquirable asset. So the asset that’s being acquired must generally be, for example, on one title.
They will also need to make sure that the customers understand they will need to have a property trustee who holds the property on behalf of the SMSF.
How much of the process can brokers take care of themselves?
It’s important for brokers to make sure, that the customer has appropriate financial and legal advice. Ultimately, it’s the responsibility of the lawyers and the accountants or financial planners working with the customer to make sure that, for example, the superannuation trustee and the property trustee are drafted in accordance with the Act.
There are also some significant stamp duty considerations that need to be considered by the customer.
Are there any tax issues or regulations that brokers need to be aware of?
It’s such a specialised area, so brokers really need to be satisfied that the customers have financial advisers who have properly advised them.
Customers need to be getting appropriate advice to make sure that the investment the SMSF is making won’t cause the fund to be non-compliant – because this can cause significant tax imposts.
For example, a compliant fund would generally pay tax of 15 per cent on earnings and funds in the accumulation phase, but a non-complying fund might see itself with a tax bill of around the 46.5 per cent marginal tax rate.
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