Lesley Thorne

Financial advisers and accountants who provide certificates for limited recourse borrowing arrangements may inadvertently provide credit advice in breach of the National Consumer Credit Protection Act 2009 and for which they may not be insured. 

Senior lawyer at The Fold Legal (The Fold), Lesley Thorne says SMSF clients seeking to enter a limited recourse borrowing arrangement are frequently asking their adviser or accountant to complete a certificate from the lender in order to confirm they have advised the client about the terms, risks, impact or effect of the loan, as well as its suitability for them and their ability to meet repayments. 

“Unless the adviser or accountant holds an Australian Credit Licence or is a Credit Representative of a licensee, it is an offence to provide ‘credit assistance’ or ‘act as an intermediary’ in relation to consumer credit,” Ms Thorne says. “This means that if the client’s loan is consumer credit and the adviser or accountant isn’t licensed or authorised, they can only provide the client and their lender with factual information.” 

Ms Thorne says where the trustees of an SMSF are individuals, a limited recourse borrowing arrangement will be consumer credit if it is to purchase, renovate or improve residential property for investment purposes. “Because the objective of an SMSF is to provide retirement funds for members, a property purchase or renovation by the SMSF will always be for investment purposes,” she says. “This means that a loan provided to SMSF trustees who are individuals intending to purchase/renovate property will be consumer credit.” 

Where a loan is to purchase a different type of asset or the SMSF has a corporate trustee it won’t be considered consumer credit, Ms Thorne says. “Advisers and accountants still need to be wary in this area though as providing advice on the loan or a certificate to the lender could still overstep their professional boundaries, leaving them vulnerable to claims by a client or a lender that aren’t covered by their professional indemnity insurance.” 

Ms Thorne’s tips for advisers and accountants when they are asked to provide an advice certificate for a client are:

• Do read the certificate carefully – understand what you are being ask to certify
• Don’t certify that you have provided advice that you are not authorised or qualified to provide, or haven’t in fact provided
• Don’t provide certification as to the suitability of a loan or a client’s ability to repay it – it is the lender’s responsibility to assess this
• Do strike through any sections that contain anything other than factual information 

Ms Thorne says it is a complex area, so if in doubt, advisers and accountants should speak to their compliance officer or seek legal advice.

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The ATO has released the draft instrument, which will remove some of the technical issues and reduce the red tape around how LBRAs operate under 67A and 67B of the Superannuation Industry (Supervision) Act 1993. Comments on the draft have to be submitted to the ATO by 31 January 2014.

SPAA expects the legislative instrument, which does not require parliamentary approval, to take effect soon after that date, and will make a submission broadly supporting the instrument.

Head of Technical and Professional Standards at SPAA, Graeme Colley, says: “It’s encouraging for the industry when the ATO as regulator of SMSFs adopts such a practical approach.

“This legislative instrument will go a long way to resolving some of the technical issues that were impeding the practical implementation of the law around LBRAs. This is consistent with the Government’s policy of reducing red tape to achieve the intended outcome of legislation.”

Colley says the main benefits of the ATO’s practical approach are:

• That problems that arose with the payment of double stamp duty in some states;
• The need for the paperwork associated with the transfer of the property once the loan had been paid out are eliminated;
• The property can be sold to the market from the holding trust when the trustees decide, removing the need for a number of intervening transactions;
• The need to retain a small second mortgage over the property that is gradually paid off in small amounts to meet the strict technical requirements of the LBRA will now not be necessary.

Colley says it will be interesting to see whether the Taxation Commissioner takes this practical approach to transactions that may have technically breached the law before the legislative instrument takes effect. In light of what’s being proposed, the assumption has to be that this will happen.

The legislative instrument applies only to self managed super funds and not to APRA funds.  Colley says: “The question arises is whether APRA will take the same practical approach as the ATO for SAFs (small APRA funds) and the larger superannuation funds.”

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