SMSF Loan Default

Hi all,
If an SMSF residential loan defaults, can the lender of the SMSF loan claim assets outside the SMSF to recoup losses at all? Or are they only legally entitled to the security property within the SMSF?
Assume for purposes of the question that the SMSF only holds the one property and some residual cash buffer.

 

There is a personal guarantee so the guarantors assets are at risk.
Smsf assets safe other than the property held by the custodian trustee.

 

Thanks Terry,
It's a hypothetical question at the moment, applicant is worried that they have not fully/correctly declared their personal asset position outside the fund to the SMSF lender. Essentially they have acquired more assets in their personal name between the time they initially submitted the application to the SMSF lender and the time they received their SMSF loan documents. They've been advised if they would like to update their personal asset position they will need to submit a new application altogether for the SMSF loan. This will cause them to miss settlement and potentially have a large late interest charge for doing so or worse the sale falls through and vendor takes their deposit.

 

Why are they worried about that?

The requirement would be to give asset position as at date of application.

 

Because partner in their ear about it, scared by the wording on the loan docs I think, specifically 'by signing you confirm these details are true and correct'. So they're not wanting to sign the loan docs because one asset is missing but as you mentioned, it was all correct at the time of application. Doesn't help their solicitor drilled into them that 'because it's an SMSF loan EVERYTHING must be correct or else' I interpret that as referring to the SMSF, bare trust, guarantor structure but they just can't see past it. Hoping common sense will prevail.

 

I had a paranoid client like this recently. I told him to write a letter stating additional assets, keep a copy, and post it back with the loan docs without amending them.

Not sure if he did it but it settled without any probs

 

That is good to hear, I'll suggest that they do the same, then their conscience will be clear - they were initially going to scribble it on the loan docs! Thankfully I called them in time.

 

And any new assets purchased after loan settled will also be available to creditors such as the bank. So they are putting the lender in a better position.

 

The members could choose to rollover other super to make good the loss to avoid this matter. The bank cannot demand (but can ask!!) for the cash after the mortgagee sale but it would be wise to repay the debt if the fund has sufficient assets or the members can roll other money to the SMSF.

The strategy of leaving the bank with a unpaid debt isnt a sound financial strategy. In the rare instance of a lender which did not seek a guarantee (some lenders) the lender may refuse to allow transfer of title until sufficient terms are agreed for them to obtain all the funds to discharge the debt.

Any property owner with an expected shortfall from a sale should seek legal advice and bank approval before offering the property for sale.

 

Agreed - not a strategy at all - would be stupidity really.
Question was what happens if they default on SMSF loan, can the lender access client assets outside of super, as Terry mentioned - there's a personal guarantee as part of the formal loan offer therefore assets can be taken if needed. Hypothetical, hasn't and won't happen, just wanted to get some clarification for a worst case scenario situation.
Ta

 

Often the lenders will require legal advice be taken by the guarantors too.

 

Yes and some also require Financial Advice Certificate be signed by Financial Planner in addition to the legal advice.

 

I don't know about this. It is not really the SMSF fund borrowing but the custodian trustee. other SMSF assets are not exposes to the bank and it might be a breach for the SMSF trustee to voluntarily pay money to a bank if it had no legal basis requiring it to - it would be a breach of the trustee's duties and there is probably something in the SIS Act which would mean a contravention too.

 

The spirit of Super Law is that there can be no "charge" therefore an SMSF loan is a limited recourse loan. Limited Recourse means that your super fund cannot be accessed by the lender. the recourse of the lender is the property itself and yes, a personal guarantee to the extent of the asset.

All SMSF loans will have personal guarantees.

When you take out a loan, each lenders documents are different, and generally they will require you to obtain independent legal advice in executing the documents. Naturally the broker should not provide the legal advice.

Cheers Ivan

 

Agreed, impossible to do so, same with the Financial Advice, broker provides the credit advice.

 

A trustee director has a right of indemnity out of trust assets - s57 SISA. Makes sense to use the cash asset before reliance on s57(1). Its not like a third party is going to sue (themself) or take it to the SCT.

The SISA limits for limited recourse borrowing doesnt say you cannot use cash to repay. Its an implied assumption since the fund has to use cash to make loan repayments in the ordinary course of its investment. The cash is a part of a loan repayment - It reduces the indebtedness. And SISA doesnt limit repayments solely to the rental income for that property either but to all the fund income sources. To assume that the custodian trustee only is party to the mortgage suggests that the repayments are an advance to the custodian trustee and no fund involvement occurs. SISA specially says otherwise. eg Fund cannot otherwise give charge etc

Technically s67A(1)(a)(ii) allows a broad range of refinancing arrangements which I have never seen tested. For example, The fund and Fred discharge the bank debt. The custodian trust comes to an end. The fund owes the trustee Director and then later receives contributions which are paid to Fred to discharge the debt arising for repaying the mortgage. Not a illegal release of funds maybe ?

 

There are whole host of issues to consider. A person may not sue themselves, but upon death there could be different people in control of different entities - someone in control of the SMSF trustee and another as executor and they may be duty bound to begin proceedings. I have seen this happen.

The right of indemnity is for the trustee and not for the personal guarantor, even if there is one person acting in both roles they couldn't allow the SMSF to reimburse them for the personal guarantee as this is not in relation to their trustee duties.

Also need to consider whether a personal guarantee being acted on would amount to a contribution to the SMSF.

The SCT doesn't have jurisdiction hear SMSF disputes. These must be heard by the supreme court - which is much more costly.

 

not impossible.....

I'm a planner and broker.

Terry I believe is a broker and lawyer.

As they say in the building trade jack of all trades, master of none.

 

I wouldn't give legal advice on a mortgage agreement if I have been the broker for the loan as could be advised of a conflict of interest.

I don't know about being a planner and broker advising on the same loan, I think they might be ok.

 

Good to know, thanks.
Just curious, what percentage of your business is mortgages vs Financial planning?