The use of borrowings to acquire assets with a long time between contract and settlement for self-managed superannuation funds (SMSFs) could cause problems for trustees in light of the legislative review scheduled for June 2012, according to an administration expert servicing the sector.
The situation referred to that might cause trustees angst is one where the borrowing taken out is to purchase property that will have construction performed on it.
“Caution should be exercised where there is a long period of time between the contract and settlement date as the relevant legislation is still raw and will almost certainly be altered in the future,” Cavendish Superannuation Queensland manager David Busoli said.
“The problem with this legislative uncertainty is that a long settlement date could be affected by a change in legislation,” he added.
Busoli said it would be anticipated that any contractual arrangements in progress while the legislative review is taking place would be grandfathered however he emphasised this may not be enough to act as a safeguard.
“When the borrowing legislation was last changed purchases that were in progress were only grandfathered if the requisite limited recourse finance had been approved. Banks will generally not provide a firm approval for finance on a contract to be settled far into the future,” he said.
This situation could be a problem for both property developers and SMSFs as in many cases the developers will want unconditional contracts to secure funding and the SMSFs may not be able to settle such a contract due to legislative change, Busoli said.
“This will be unacceptable to many developers who may require an unconditional contract but it would be imprudent for SMSF Trustees to ignore the legislative risk,” he said.
