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Property market downturn raises ‘sole purpose’ issue with personal guarantees

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By Miranda Brownlee
16 September 2022 — 1 minute read

SMSFs have been warned that holding onto property assets to avoid claims on personal guarantees may be a compliance issue.

Speaking at a recent Heffron event, Heffron head of SMSF technical and education services Lyn Formica said one of the issues to watch out for with limited recourse borrowing arrangements at the moment is falling property values.

If the value of the underlying property of the LRBA falls below the SMSF’s outstanding loan amount, then the trustee is left with two options, said Ms Formica.

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“The trustee could just simply walk away from the transaction. As it's limited recourse, the lender would take the underlying asset but they wouldn’t have any recourse to any of the other assets in the superannuation fund,” Ms Formica told delegates at the Heffron Super Intensive Day.

“The second option is that the trustee just keeps paying under that loan arrangements. They might decide to do that if they think its just a temporary adjustment and that it will eventually recover in value and is therefore still a good investment for the super fund.”

However, where the trustee decides to keep paying the loan because of personal guarantees they have provided, this raises potential issues, Ms Formica warned.

“My concern is where the trustee is continuing to make the loan repayments and the reason they’re doing that is not because they think the property will recover in value but [because] they’re worried that if they walk away from the transaction and the lender takes that asset, [the lender] may want to claim on the personal guarantees given by the member.”

“If that's the reason why the SMSF trustee is continuing to hold on to this asset and make loan repayments, then we potentially have a problem with the sole purpose test.”

Ms Formica said its very important that SMSF trustees “have their house in order” and have their story straight as to why the trustee is continuing to make loan repayments in situations where the asset has fallen below the outstanding balance of the loan.

 

 

Property market downturn raises ‘sole purpose’ issue with personal guarantees
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