Guidance on guarantees needed to stop breaches: lawyer

Guidance on guarantees needed to stop breaches: lawyer

The ATO must provide further clarification about guarantees, according to one industry lawyer, with certain guarantees implemented by banks having the potential to lead to fund contraventions.

 DBA Lawyers director Daniel Butler said there are still several issues regarding guarantees for limited recourse borrowing arrangements (LRBAs) that need to be teased out, particularly as some of the ATO material is “quite inconsistent”.

Mr Butler said that in some cases, where the guarantee is above the value of the asset in the borrowing arrangement, this could actually lead to the SMSF contravening the law.

“If an [SMSF] has $1 million worth of shares and they plummet to zero, under 67A there is a requirement that neither the lender nor any other party can [attempt] to get any more than the value of the asset from the trustee,” said Mr Butler.

He stressed that it is therefore very important that SMSF practitioners and their clients inspect guarantees imposed by banks for LRBAs since not all guarantees are the same.

“The guarantee should not exceed the value of the asset," Mr Butler said. "If the guarantee does exceed the value of the asset, there’s a potential issue because then the guarantors have paid out more than the value of the asset. The guarantors then stand in the shoes of the lender in recovering the amount they paid out from that super fund.

“If the guarantee is above the value of the asset then you’re contravening 67A and [therefore] contravening the law and you’re potentially going to render the fund non-complying.”

One major issue is that guarantees are sometimes supported by mortgages over the property in addition to the guarantee.

“There’s also a question of, well, if you pay a guarantee fee to your bank is that a thing that the super fund should offset as it could otherwise give rise to NALI?” he said.

“The ATO material is still quite inconsistent, so we’d like to get further clarification from the ATO on where they sit on guarantees.”

The fact that many guarantees have no real market value is also a concern, Mr Butler said.

Read more:

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Trustees falling into LRBA traps with bankruptcy

 

Guidance on guarantees needed to stop breaches: lawyer
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