Clarity needed around personal guarantees for SMSF loans
The Australian Taxation Office (ATO) should clarify the rules around borrowing under self-managed super funds (SMSFs) as there are several risks for trustees giving personal guarantees.
According to Michael Kolikias of Quantam Warrants, under superannuation borrowing laws trustees can only borrow through a limited recourse loan that prevents the lender from claiming against the super fund assets.
However, he said SMSFs are using instalment warrants to gear into property and the big banks are requesting personal guarantees and credit checks, as they would for ordinary loans.
He said the ATO has not clarified whether it considers personal guarantees to comply with the borrowing rules under the Superannuation Industry (Supervision) Act 1993 and that such arrangements could be a breach given the loans are required to be limited recourse in nature.
“When trustees provide a personal guarantee they accept personal financial responsibility if the lender makes a loss after selling a property as a result of a default,” he said, adding that by asking for a personal guarantee, the banks are sidestepping the protection of the limited recourse loan.
“SMSF trustees and their advisers should closely examine the process, costs and the risks associated with using personal guarantees before agreeing to them,” Kolikias said.
“While a personal guarantee doesn’t commit other assets held in the super fund, investors are asked to secure the loan with their personal assets.”
Kolikias said another concern is that recent ATO draft rulings suggested that in the event of default, any additional personal contributions to meet shortfalls might be regarded as SMSF contributions and potentially lead to SMSFs exceeding the contributions cap.
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