Buying a property with 2 loans isn’t as simple as it sounds
Using two loans to acquire a property for an SMSF can be done, but there are layers of documentation and regulations that must first be met, says a technical expert.
Leigh Mansell, director for SMSF technical and education services at Heffron, said there is nothing in the SIS Regulations that indicate an SMSF cannot have more than one loan to acquire a property.
But she warned the critical part of that regulation states that SMSFs are prohibited from borrowing except for certain circumstances.
“One of those circumstances is when the borrowed funds are used to acquire an asset,” she said.
“If you are looking at getting two loans to acquire an asset, you’d want to make sure that the documentation that you’ve got indicates that both loans point to the acquisition of that particular asset.
“You don’t want there to be any wiggle room that could be misinterpreted. You don’t want it to look like the loan from the bank relates to that property, but the other related party loan doesn’t.”
Ms Mansell said it has to be clear on all documentation that the two loans are for the acquisition of the one property.
“Six or seven years ago, before the ATO released its safe harbour rules, it wasn’t unusual to see a property acquired using a bank loan where the bank lent to a certain level, then a related party loan to ‘top up’ what was needed – and all the documentation dovetailed into the acquisition of that property without any problem,” she said.
“However, then the ATO issued its practical compliance guideline or safe harbour rules in relation to non-arm’s length income, and so while it might meet the requirements of SIS, there [are] tax laws that also apply.”
She said that in the tax law sphere, it could be a situation where both loans would need to comply with an arm’s length arrangement.
“Often the problem when you’ve got two loans to buy the one asset is a lot of people use the safe harbour terms and conditions for that second loan, and some of the challenges in those safe harbour provisions are that there’s a maximum 70 per cent LVR at the time you enter into the borrowing,” she said.
“If you’ve got a bank lending 60–65 per cent, and the extra bit you need from a related party loan takes the combined value of the loans above 70 per cent LVR, it wouldn’t work if you’re trying to use the safe harbour rules for that related party loan.”
She added that in regard to the safe harbour rules, there also has to be a registered mortgage over the property.
“If you’re using a commercial lender, they’ll want to hold the first mortgage. To comply with the safe harbour rules on the related party loan, a second mortgage would need to be put over the property.
“One of the things within the loan contract with the commercial lender is it might actually say you’re not allowed to borrow against this property without the bank’s permission, so you might end up with a situation where you’re a bit hamstrung being able to get a second loan to fund the purchase of that property even if you do make the 70 per cent LVR,” she said.