Urgent review needed on SMSF loan offset dangers
A non-bank lender has warned SMSFs to urgently review any residential property loans in their fund that have an offset attached, after receiving advice that such products issued by non-bank lenders may fall foul of super laws.
Firstmac director Kim Cannon said it has shelved plans to offer an offset with its residential SMSF lending product after receiving advice that such products may “fall foul” of superannuation laws.
“We have taken the trouble of getting advice, in order to ensure that our customers are going to be compliant with the much more restrictive rules around SMSF borrowing,” Mr Cannon said.
“As a result of that advice, we have shelved plans to offer an offset but established that there are SMSFs out there with loans that may be non-compliant.”
The issue stems from SMSF offset accounts that are structured as a redraw offset facility in the loan account, within the specific context of the superannuation legislation.
According to section 67 of the Superannuation Industry (Supervision) Act 1993 (SISA), a redraw on an SMSF loan is effectively considered to be a new loan, a new advance that requires all of the compliance checks for an advance. No lender currently makes these compliance checks on a redraw offset facility and it would not be feasible.
Mr Cannon said that SMSF trustees who had taken out an SMSF property loan that uses a redraw offset facility were potentially exposed to being non-compliant under the superannuation legislation.
“If you have an SMSF and it’s doing something that isn’t compliant with the legislation, then the tax status of the super fund is compromised,” Mr Cannon said.
“The ATO can withdraw the preferential treatment that is given to your super fund, so instead of paying 15 per cent tax you could end up paying 50 per cent tax, including on historical earnings.”
The latest ATO data shows that, in 2020, SMSF owners’ Australian residential property holdings increased by 7.5 per cent, to $39.1 billion, on the back of an 8.8 per cent jump in their total non-recourse borrowings to $50.23 billion.
Mr Cannon said that standard home loan products with a redraw offset facility are within the ATO ruling on offset accounts and did not raise tax concerns.
Firstmac recently moved to shake up the SMSF lending market, launching a simple, low-fee product with both variable and fixed-rate options.
The product has the lowest fees in the market, according to Firstmac, with no application fee, no annual or ongoing fees, no settlement fee and no legal fees for a refinance.
Tony Zhang
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.
