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Let’s Talk About Compliance: SMSF Loans and Offset accounts

Offset accounts for residential self-managed superannuation fund (SMSF) loans have been available since residential lenders entered the segment. In this article, we explore the compliance position regarding the SIS Act, (the regulatory framework that governs an SMSF).

There are several points to be mindful of before addressing the offset position of an SMSF. Firstly, the trustee of an SMSF must not give a charge, such as a mortgage, over an asset of the fund. Secondly, the SMSF may only borrow in very limited circumstances, one being a limited recourse borrowing arrangement (SMSF loan).

When an SMSF loan funds a property purchase for the SMSF, the property must be legally owned by a separate trustee commonly known as a security trustee or bare trustee, that trust must reflect the SMSF Trust as the beneficial owner of the property. This approach supports the fact that the SMSF itself still isn’t giving a mortgage over an asset legally owned by the SMSF.

There are also some crucial restrictions to be aware of with a SMSF loan:

  • The borrowing is limited to the acquisition, maintenance and repair of the property.
  • The rights of the lender (or person such as a guarantor) are limited to the acquired asset.

So, how do the above points interact with an SMSF loan with offset?

The initial offset accounts provided to SMSF borrowers were provided by ADI’s (Authorised Deposit-taking Institutions), such as banks, licensed to hold deposit accounts. Therefore, those separate deposit accounts are not directly captured under the mortgage. 

These days, non-banks are the primary lenders in the market now that banks no longer support SMSF lending. An offset account with a non-bank lender is usually a sub-account of the loan facility. In this case, the considerations are:

  1. Whether this would result in the lender having a mortgage over an asset other than the acquired property (ie. the deposit funds) in the offset account, which is not permitted. 
  2. If the sub-account is not considered a separate asset and deemed to be available redraw within the loan facility, those redraw funds may only be permitted for maintenance and repair of the acquired asset. Any other use, such as improving the property while the SMSF loan is in place, or assisting with the deposit for another property purchase, may be deemed non-compliant.

Due to limited industry guidance and Bluestone Home Loans opinion of the potential compliance risk to the SMSF trustee, an offset is not a feature on the SMSF Residential Loan. The associated penalty of using the non-compliant offset funds may result in significant ATO administrative penalties to each trustee of the SMSF.

If you or your customer are considering an offset feature on an SMSF loan, we recommend you enquire further with the lender on whether their offset account presents a compliance risk to the SMSF.  

Click here for further information on the Bluestone SMSF residential loan.

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