Firstmac issues warning on SMSF loans offsets

Firstmac has warned self-managed superannuation fund (SMSF) trustees to “urgently” review any residential property loans in their funds that have an offset attached, stating that it has received advice that such products issued by non-bank lenders may fall foul of super laws.

According to managing director Kim Cannon, Firstmac had been considering offering an offset with its new residential SMSF lending product, which it launched in February this year.

The lending product includes both variable and fixed-rate options, and has no application fees, annual or ongoing fees, settlement fees, and no legal fees for a refinance, while it requires “minimal supporting documents”, Firstmac had said.

Commenting further on Firstmac’s consideration of offering an offset with its SMSF lending product, Mr Cannon said: “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.

“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.”

Mr Cannon explained that the issue has arisen from SMSF offset accounts that are structured as a redraw offset facility in the loan account, within the specific context of the superannuation legislation.

He said that 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, and a new advance.

As such, this would require all of the compliance checks for an advance, Mr Cannon said, adding that no lender currently makes these compliance checks on a redraw offset facility, and it would not be “feasible”.

Mr Cannon warned 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.”

Mr Cannon added that standard home loan products with a redraw offset facility are within the ATO ruling on offset accounts, and did not raise tax concerns.

His analysis of the latest ATO data revealed 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.