#SMSF Alert : ATO guidance on related party SMSF loans (LRBAs) – Update


ATO guideline LRBAs

The ATO have issued long-awaited guidelines providing SMSF trustees with suggested ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.

By implementing these “Safe Harbour” loan terms, SMSF trustees are assured by the ATO Commissioner that

..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement.

It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs)  be reviewed prior now extended to 1 Jan 2017

 Where has this come from?

The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender – where the terms of the loan were not deemed to be on commercial terms.

These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.

NALI is taxed at the top marginal tax rate, currently 47% – regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15%  or in pension phase when the income would usually be tax exempt.

After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.

The Nitty Gritty Details of the Safe Harbour Steps

The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.

The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.

Broadly, this PCG outlines two ‘Safe Harbours’. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm’s length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.

The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.

Safe Harbour 1 Safe Harbour 2
Asset Type Investment in Real Property Investment in a collection of Listed Shares or Units
Interest Rate RBA Indicator Lending Rates for banks providing standard variable housing loans for investors. Use the May rate immediately preceding the tax year.
(2015-16 year = 5.75%)(2016-17 year = 5.65%)

(2017-18 year = 5.8%)

Same as Real Property + a margin of 2%
Fixed / Variable Interest rate may be fixed or variable. Interest rate may be fixed or variable.
Term of Loan Variable interest rate loans:

Original loan – 15 year maximum loan term (both residential and commercial).

 

Re-financing – maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).

 

Fixed interest rate loan:

Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

Variable interest rate loans:

Original loan – 7 year maximum loan term.

 

Re-financing – maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.

 

Fixed interest rate loan:

Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.

Loan-Value –Ratio

LVR

Maximum 70% LVR for both commercial & residential property.
Total LVR of 70% if more than one loan.
Maximum 50% LVR.

Total LVR of 50% if more than one loan.

Security A registered mortgage over the property. A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee Not required Not required
Nature & frequency of repayments Each repayment is to be both principal and interest.

Repayments to be made monthly.

Each repayment is to be both principal and interest.

Repayments to be made monthly.

Loan Agreement A written and executed loan agreement is required. A written and executed loan agreement is required.
Information sourced from Practical Compliance Guidelines PCG 2016/5.

Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.

Where to find the Indicator Rate in future year:

The PGS referred to: Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:
– For the 2015-16 year, the rate is 5.75%
– For the 2016-17 year the rate is 5.65%

For 2017-18 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)

It is the applicable rate under Column N of the above spreadsheet (click on link). The rate seems to have started in August 2015 but I assume we must use the May rate from now on.

In referencing the Indicator Rate you can use:
Ref: Title: Lending rates; Housing loans; Banks; Variable; Standard; Investor
Lending rates; Housing loans; Banks; Variable; Standard; Investor
Frequency: Monthly
Units: Per cent per annum
Source RBA
Publication Date 04-Apr-2016
Series ID: FILRHLBVSI

Example – Real Property taken from Practical Compliance Guideline PCG 2016/5 Example 1

A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.

  1. The borrower is the SMSF trustee.
  2. The lender is an SMSF member’s father (a related party).
  3. A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.

The loan has the following features:

  1. the total amount borrowed is $500,000
  2. the SMSF met all the costs associated with purchasing the property from existing fund assets.
  3. the loan is interest free
  4. the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
  5. the term of the loan is 25 years
  6. the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
  7. the loan agreement is in writing.

Consistent with ATO ID 2015/27 and ATO ID 2015/28, the LRBA is not considered to have been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, will give rise to NALI.

At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.

To avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.

Option 1 – Alter the terms of the loan to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).

To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:

  1. The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).

Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.

  1. The loan term cannot exceed 11 years from 1 July 2015.

The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.

  1. The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.

The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the $49,900 capital repayment, into account.

  1. After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.

For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option 2 – Refinance through a commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Option 3 – Payout the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Each option will have many advantages and disadvantages – so it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation

Important Note to 13.22C or Unrelated Unit Trust Investors

The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.

Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.

UPDATE (Relief for those caught by Budget measures)

In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:

  • where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and
  • where additional contributions are made in order to comply with the Australian Taxation Office’s (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.

Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Click here for appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.


We constantly have people contacting us with ideas of what they want to do with an investment property once they have borrowed to purchase one in their SMSF. Some are sensible but some show no grasp of the regulations at all and include moving the whole family in to save on their home mortgage or knocking it down to build a multi-storey unit development. If you run a self managed superannuation fund, you have the ability to invest in residential property or commercial property and under certain circumstances a farm. (Note: ability to do something does not mean you should).

Repairs v Improvements

Repairs v Improvements

Borrowing to purchase a property in an SMSF or in the industry jargon a “limited recourse borrowing arrangement (LRBA)” has been legal since 2007 and is becoming increasingly popular with SMSF owners seeking to leverage their funds.

In May 2012, the ATO released a ruling SMSFR 2012/1, “Self Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts.” To clarify its understanding of the legislation.

It should be noted that the ATO focused on borrowing to invest in property as it saw this as the most likely area people would encounter problem scenarios. They key issues that the ruling addresses are:

–   defining a single acquirable asset

–   property development and off-the-plan purchases.

–   distinguishing between improvements vs repairs or maintenance.

–   improving an asset to the extent if becomes a replacement asset.

In this article I will concentrate on the latter 2 issues as it is ok to use borrowed funds for most repairs or maintenance but you can’t use borrowed money to finance improvements. You can use your other funds in your SMSF to fund improvements so it is a matter of getting the strategy right.

The ATO has given specific meanings to the following words:

‘Maintaining’ an asset typically involves work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense). For example, repainting a timber house to prevent deterioration is typically maintenance

‘Repair’ ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property.  A repair replaces a part of something or corrects something that is already there and that is damaged, has become worn out or dilapidated or has deteriorated. Repair may be necessitated through ordinary wear and tear, accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

‘Improvement’ the guidance is that they mean work that:

  • provides something new
  • generally furthers the income-producing ability or expected life of the property
  • generally changes the character of the item you have improved
  • goes beyond just restoring the efficient functioning of the property

So what can you do and what can’t you do?

The following scenarios outline when an existing LRBA will continue to apply to an asset, based on the ATO’s SMSF ruling.

1. Using Borrowed Money : Repairs and Maintenance (Yes You Can) v Improvement (No You Can’t)

Work to be carried out Repair or maintenance (Yes you Can under an LRBA) Improvement (No you Can’t under an LRBA)
Residential property
A fire damages part of the kitchen (cooktop, benches, walls and ceiling). Restoring the damaged part of kitchen, including addition of a dishwasher, even if there wasn’t one there before (considered minor). Yes you can If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house the external kitchen would be an improvement. No you can’t
Replace guttering Yes you can
Replace fence Yes you can
Replace house destroyed by fire Rebuild comparable house. Yes you can Rebuild house not comparable (although if built from insurance proceeds does not affect LRBA) No you can’t
A pergola is built to create an outdoor entertaining area. No you can’t
The addition of a swimming pool or a garage. No you can’t
A house extension to add another bathroom. No you can’t
Cyclone damage to a roof Replace roof: Yes you can Add a second storey at the same time as replacing roof.  No you can’t

Source: ATO SMSFR 2012/1

 

2. Development while under a LRBA: Retains Same Attributes (Yes You Can) v Creates a different asset (No You Can’t)

Asset and Action Result
1.  Vacant block of land on single title. A vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.  Different asset created No You Can’t
2. Vacant block of land on single title. A residential house is built on vacant land which is on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset. Different asset created No You Can’t
3. Residential house and land. A house is demolished following a fire and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets. Different asset created No You Can’t
4. Residential house and land. A residential house is converted into a restaurant by renovations which include fitting out a fully functioning commercial kitchen. As a result of the renovation the character of the asset has fundamentally changed from residential premises to restaurant premises. This is a different asset. Different asset created No You Can’t
5. Residential house and land. One bedroom of a residential house is converted to a home office. This would not ordinarily result in a change in the overall character of the asset as a residential house. The conversion of the bedroom into an office does not result in a different asset.  Same asset – Yes You Can
6. Residential house and land. A fire destroys a four bedroom house and a new superior residential house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (whether of the same size or larger) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example, would also not change the character of the asset. Same asset – Yes You Can
7. Residential house and land. While each of the following changes would be improvements each (or all) of the changes would not result in a different asset:

  • · an extension to add two bedrooms;
  • · the addition of a swimming pool;
  • · an extension consisting of an outdoor entertainment area;
  • · the addition of a garage shed and driveway;
  • · the addition of a garden shed.
Same asset – Yes You Can
8. Residential house and land. To allow a road to be widened, a local government authority undertakes the compulsory resumption of a minor portion of the frontage of a property which has a residence on it. While the resumption results in the existing property title being replaced, the minor extent of the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights but also the object of those proprietary rights, remains that of being the residential property. Same asset – Yes You Can
9. Residential house and land. A ‘granny flat’ is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage. The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset. Same asset – Yes You Can

Source: ATO SMSFR 2012/1

Conclusion

There is no doubt that this ATO ruling and the examples given are good news, and much appreciated by the SMSF industry who have to deal with enquiries every day. It provides a substantial amount of clarity around many issues that had previously been quite unclear. The common sense and commercial approach by the ATO has also been welcomed and was somewhat unexpected.

I always suggest that SMSF Trustees keep sufficient cash flow in the SMSF to finance repairs and maintenance or any expected improvements rather than using borrowed funds and risk running foul of the rules.

You should however carefully consider any strategy in the light of these rules and make sure you get a second opinion as often if you are too close to a project you can be blinded to its faults. That’s where a good team of advisors comes to the fore.

Checkout : Can I borrow to buy a house and land package off the plan in my SMSF?

As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Liam Shorte B.Bus SSA™ AFP®

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser Follow SMSFCoach on Twitter  Liam Shorte on Linkedin  NextGen Wealth on Facebook  

Verante Financial Planning

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@verante.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Super changes will hit saving strategies


Please find a link below to an article on the Macro Business blog website about the expected and unexpected effects of the proposed Super changes.  No More Tax Free

http://www.macrobusiness.com.au/2013/04/super-changes-will-hit-saving-strategies/

Macro Business has an excellent engaged readership and as always the comments tend to be very valuable at exploring the details of any subject just that little bit further.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Can I borrow to buy a house and land package off the plan in my SMSF?


I have had a number of enquiries about this strategy in the last few weeks and I felt it was worth clarifying some details.

Off the Plan

Off the Plan

As with any strategy where you commit to a large future purchase in a moving market and also take a risk on the developer performing to contract, buying off the plan can be risky.  Especially because of the way these contracts shift the risk away from the developer.  With a Self Managed Super Fund purchase with a mortgage this can be even more of an issue if the proposed lender’s final valuation comes in lower than the contracted price which is more common recently. You may then be forced to come up with the shortfall in your SMSF which may be more difficult if you have exhausted your contribution limits.

Here are the basic essentials to getting this type of strategy right:

  • The “property purchase” should be subject to one contract which must be for the completed house and land. Do not purchase land and then look for an SMSF loan to construct a property on it. You will be too late to use the land as security.
  • It is often better to have the SMSF pay the deposit and only have the lending arranged as part of the settlement. In my opinion the Holding Trust should still be in place with the Custodian/Holding Trustee on the title of the contract from the outset.
  • Ensure that the bank/ lender’s only security is only over that land and completed house/unit;
  • The only payments made in respect to the purchase are for the deposit and settlement with no “progress payments”. You may breach the “single acquirable asset” rule which is a big no-no!.
  • Be prepared to move quickly at the time of settlement. LRBA loans do not go through lender’s quickly and you should have as much of the documentation prepared in advance and ready to go as is possible. Drum this into your Mortgage Broker and Solicitor.
  • Do not borrow to the limit of your SMSF. Make sure you have some liquidity to manage low valuations or the demand for a lower LVR from the lender. Alternatively have the capacity and ability to add funds to your SMSF without breaching a contribution cap.

Now there are some who feel that more than 2 payments are possible and that the law is silent on the matter but my philosophy is to KEEP IT SIMPLE! Why makes things difficult for yourself especially when there are developers out there redesigning their contracts to meet the basic 2 payment strategy.

For those looking for more detail I would recommend reading the  issues addressed by the ATO their Taxpayer Alert TA 2012/7 and in the minutes of discussion at the NTLG Super Technical sub-group (December 2012) (if you can find a copy as the ATO took down the page) with specific reference to  example 10 within SMSFR 2012/1.

My final tip is to use a SMSF Specialist Advisor who has dealt with SMSF property borrowing and look for references from client’s they successfully guided through the process. Use a conveyancer or solicitor with experience in the intricacies of these strategies. Use a Mortgage broker that knows how to place these specialised loans and is thinking ahead at all times. Oh and READ YOUR TRUST DEED!

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Property through super in a SMSF – Part 3: 20 most common mistakes


Buy Sell PropertyFollowing on from our previous 2 articles on SMSF and Property, the next logical step is to show where others have commonly made mistakes and how to avoid these errors. I have looked at the errors as they would be experienced in the pre-planning phase, during the borrowing process and once the loan is in place to make it easier to follow and to refer to later. In my opinion, these errors are the most common cause of investor angst and additional costs. They can lead to extremely negative experiences when borrowing to buy property inside a SMSF and are best avoided!

Before the purchase:

Error #1 – Believing purchasing an SMSF property purchase is a standard process

The superannuation system was set up as a concessionally taxed system with one sole purpose and that is to provide for retirement income. The regulators therefore are determined to preserve the integrity of this aim and you should keep this in mind when dealing with any issue related to superannuation and your self-managed super fund in particular.

There are numerous compliance obligations that you must consider that would not be of concern to you if buying a property in your own name or that of a family trust.

Those jumping in and expecting to be able to fix mistakes should be aware that the system leaves little room for error or mitigation of mistakes.

Error #2 – Not seeking pre-approval of a loan and knowing the lender’s requirements before incurring costs

I recommend you use a broker to find out exactly what the lender will require for a loan and check if you would qualify in financial terms before incurring any of the costs in the process. You should expect closer scrutiny of the fund’s deed and financials, your own position and the advice you have received than with ordinary property loans because the lender is offering you a limited recourse product.

Error #3 – Using out of date SMSF trust deeds

Limited recourse borrowing arrangements for superannuation funds is still relatively new and was introduced in September 2007 with a major update to the law in July 2010. Further clarifications were made only last year and they may be needed to implement your chosen strategy. Any trust deed set up before July 2007 is unlikely to have the relevant powers required to borrow, grant a charge over an asset, or use a holding trust. As such, I would always recommend a deed upgrade before commencing the process.

And as the lender’s solicitors will review your deed before authorising the loan, any omissions in the deed will only result in delays, costs to rectify the deed and possibly additional fees to the lenders solicitors to approve such subsequent changes. You may miss your settlement date and breach your contract as a result.

Error #4 – Not having a consistent record of contributions or ability to forecast future contributions

Another reason for planning in advance for this strategy is to be able to display a history of making regular contributions to the fund to satisfy bank requirements. They will question the lack of contributions as an indication of financial hardship or lack of commitment to building liquidity in the fund. Likewise, you need to be able to show capacity to make future contributions. Already, the lowering of the concessional contributions cap to $25,000 has put some single member funds in trouble.

During the contract process:

Error #5 – Not making one person responsible for management and control of the process

The process, as outlined in last week’s article, involves the lender, the vendor and your own legal advisers, your tax advisor/accountant, possibly a legal document company and a mortgage broker. You can see that a delay in any part of the process can be a nightmare to sort out. You can see the benefit of having someone on your side who does know what they’re talking about when it comes to SMSF property investment. Ideally that person should be prepared to overview the deal and be the central point of contact for the others involved who may have issues. Having been brought in to handle problems I can tell you that it can be a mess to untangle.

Error #6- Buying a property before the SMSF is properly set up or the holding trustee registered

There is no room for “buy now – think later” moves on a weekend buying spree when dealing with an SMSF. If the SMSF has not been setup then a trust does not exist. If you sign a contract or place a deposit for a property without having the name holding Trustee Company established then you face double stamp duty and capital gains tax issues.

Error #7 – Not setting up the SMSF and holding trust correctly

Using individual trustees for either the SMSF or the holding trustee may lead to finance being delayed or refused. It may also lead to potential exposure to litigation, putting personal assets at risk. For example, should a trades person be injured while working on the property and sue all parties for negligence, an individual trustee will be directly exposed. Using a trading company as trustee for either position is also a mistake, likely to compromise the “bare” trust arrangement.

Error #8 – Not properly implementing rules concerning ‘single acquirable assets’

In simple terms, the rules state that trusts should purchase a single asset on one title. The recent ATO ruling SMSFR 2012/1: application of key concepts with LRBAs, provides a degree of clarity by explaining under what circumstances an asset could be viewed as a single asset, which predominantly revolves around whether it cannot be dealt with separately (even if multiple titles are involved). The ATO gives 15 examples as a guide.

Error #9 – Using the lender as holding trustee in a related party loan (where you lend to your fund)

The presence of any conflict, like in a case where the holding trustee is also the lender to the fund, may weaken the “absolute entitlement‟ of the SMSF to the asset. This could have capital gains and land tax consequences for the fund. An example would be the loan coming from your family trust and having the trustee of that family trust also act as the trustee of the holding trust.

Error #10 – Signing up the holding trustee as the borrower instead of the SMSF trustee

Again, I would emphasise that the holding trustee simply holds the title and nothing else. The SMSF trustee is the beneficial owner and must be the borrower on all documentation. If the holding trustee is the borrower, then full stamp duty will be payable on any transfer of title from the holding trustee to the SMSF Trustee when the loan is paid up. Sometimes the holding trustee will have to sign documentation in order for the documentation to be effective. Where this is the case, it should be recorded that the trustee is acting on the instructions of the beneficial owner (i.e. the SMSF trustee).

Error #11– Paying holding fee, deposit, settlement payment or any costs from any source other than from the SMSF

All payments in respect of the transaction must come from the SMSF bank account or the loan facility. In order to facilitate the property transfer on completion of the loan, a documentary evidence showing the trail of payments will be need to be submitted with the request. This is another reason for getting the holding trust deed stamped as recommended later in order to pick up on errors early and seek remedies before financials are completed. This is far better than trying to find solutions years later.

After the settlement:

Error #12 – Breaking the “arm’s length” and “sole purpose” rules when dealing with related parties

If you have any interaction with the SMSF directly yourself, or through a company or trust entity controlled by you or a related party, you must be very careful to do so as if dealing with a third-party. Here are a few examples of what this means:

  • putting a proper lease in place for business real property;
  • paying rent on time;
  • making loan repayments on time or charging penalty rates as per the loan agreement;
  • not making personal use of an SMSF residential property even if you agree to pay rent; and
  • not letting your child or sibling move in to a residential property while they get through a rough time.

Tip: For an online source to a flexible comprehensive lease agreement that ticks all the boxes  you can visit DIY Legal Kits – Lease Agreements

Error #13 – Leaving the stamping of the holding trust deed to be completed too late

The holding trust deed must be stamped to ensure that the final transfer from the holding trustee to the SMSF trustee attracts only nominal stamp duty. Best practice, and in some states the rules dictate it, is to have the final transfer stamped generally within 30-90 days after it has been activated. As mentioned previously, it makes common sense to gather all the supporting documents stamped while available, and the process confirmed before doing the funds financials for the year.

Imagine if your spouse had passed away, or you lost some of the bank’s statements/documentation when trying to do it later, and found double stamp duty being applied by the regulators in your state. Better safe than sorry.

Error #14 – Holding Trustee doing anything other than holding legal title

The holding trustee only exists to hold legal title to the property while there is a loan outstanding. It may also grant security via a mortgage to the lender and enter into leases of the property on behalf of, and as instructed by, the SMSF trustee. A common mistake is for the holding trustee to have its own Australian business number (ABN), tax file number (TFN), or bank account, which should all be avoided.

If the holding trustee performs any other active duties and does not act solely at the direction of the SMSF trustee, then the holding trust may be found to be a separate entity for the purposes of reporting GST. It would then need to prepare and lodge tax returns and the look-through approach to the holding trust may not apply for income, land tax and CGT purposes, which of course means outside of the concessional superannuation environment.

Beware of any lender that requests additional duties on the holding trustee and have your solicitor seek to remove these clauses.

Error #15 – Not considering the liquidity needs of the SMSF during retirement phase

If you plan to put your fund into pension phase while still holding the property then you need to ensure the fund has enough liquidity to pay the minimum pensions, expected lumps sums and maintenance costs of the fund, such as accounting and advice fees. If unable to do so you may exacerbate the position by having to return to accumulation phase and pay tax on the rental income.

Error #16 – Not considering the liquidity needs of the SMSF during periods the property is unoccupied

Property occupancy is rarely continuous and you need to ensure you have the liquidity to make loan repayments and property expenses during periods without tenants. This is why we warn about setting up funds with small balances or using a high proportion of the fund balance for a single asset purchase.

Error #17 – Not considering insurance for the property, the SMSF members’ lives, or your contribution capacity

You need to make sure the property is insured in the name of the SMSF trustee so a loan can be paid out in the event of fire or destruction. You should also ensure that unless you have other funds available within the fund, or can contribute enough to repay the loan on death of a member, that you have life and disability cover up to at least the value of the loan on each member. If you are negatively gearing, and will rely on your contributions to the cover loan repayment shortfall, then you should additionally consider income protection insurance.

Error #18 – Not understanding the rules regulating the use of borrowed funds for repairs and maintenance, rather than improvements

You can harness the DIY renovator within you but the property developer may need to be shackled when it comes to SMSF property under a limited recourse borrowing arrangement.

Again, I refer to SMSFR 2012/1 for an explanation of the differences between these very similar terms. In basic terms, you can repair and maintain with the borrowed funds but can only improve the property to a certain extent with other funds of the SMSF. Your SMSF’s auditor and the ATO will keep a close eye on any such expenses and the source of funding. Read here for more detail SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.

Error #19 – Going a step too far and creating a ‘replacement asset’

Remembering this is not a business venture, it is an investment within a heavily legislated structure that has a primary focus of providing for your retirement, you need to be wary of any form of ‘development’.

If you proceed to make improvements so extensive that the result is an asset that is substantially different from the original then you may have in effect created a ‘replacement asset’ in the eyes of the regulator: the ATO.

Some examples of ‘replacement assets’ provided by the ATO include:

  • the subdivision of a single plot of land on a single title into smaller plots with individual titles;
  • the building of a house on a vacant plot of land;
  • the demolition of an existing house and its replacement with three strata title units; and
  • the re-zoning of the land upon which an existing house stands and its transformation into commercial premises.

If the ATO considers that the character of the asset has been changed to such a degree, as outlined in the examples above, it now constitutes a replacement asset that they will deem falls outside the guidelines and may make the SMSF non-compliant.

Error #20 – Not registering for GST in the name of the SMSF trustee only

Thanks to recognition of the strategy by the tax office, where the property is commercial and the GST turnover is greater than $75,000, you do not need to register the holding trust for GST, only the SMSF needs to be registered.

This also means if the property is transferred to the SMSF trustee, this doesn’t constitute a taxable supply and thus does not give rise to a GST liability.

The bottom line: This is a comprehensive, but probably not exhaustive list of the errors that SMSF trustees can make in the process of managing a loan to purchase a property in their super. It is essential that you plan the purchase of a property well and do not act in haste or take advice from someone well-intentioned but without a clear understanding of the laws. Experience in dealing with the transaction from start to finish is essential to avoid repeating other peoples’ mistakes.

As always please contact me if you want to look at your own options. You can make an appointment by clicking here. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Property through super in a SMSF – Part 2: The Process


Follow the Process on SMSF BorrowingThis is Part 2 of a 3 part series. In the first article, we looked at the background to the limited recourse borrowing arrangements that can be used by SMSFs to invest in an asset, specifically a residential or commercial property. Now we look at the actual process (using NSW as our base as different states have slightly different rules).

  • Real estate investing and self-managed superannuation can be combined activities, but there are rules to be aware of.
  • Borrowing is one of the more complex areas in this process, but it can still be broken down into relatively simple steps.
  • It’s certainly not child’s play, but this week we show how limited recourse borrowing arrangements can work.

As we detailed last week in the first of this series, placing real estate investments into self-managed superannuation funds (SMSFs) needn’t been a Herculean task, but it does require careful planning. Most of all, however, you or your advisors need to be fully conversant with the current borrowing exception that is detailed in section 67A of the Superannuation Industry Supervision (SIS) Act. SMSF borrowing is more correctly termed as a limited recourse borrowing arrangement (LRBA). This week we take a closer look at LRBAs and show you the typical steps involved.  (more…)

Questions to Ask Yourself Before Considering an SMSF Property Investment


I have had a lot of enquiries lately for advice on SMSF loans for property investment and we have run regular educational seminars on the issue for clients and the public. My main observation from the enquiries I have received is that people are jumping on the band wagon without checking if they really need to take on the additional risk and costs involved. Here are some simple questions to consider before starting the process.

  1. Are you ready to seek advice, take advice and follow that advice? This is not an area to mess around with and the penalties of getting it wrong are expensive and time-consuming so unless you are willing to learn the rules, follow the rules and do the necessary paperwork as well as pay the initial set up costs then STOP NOW! Look elsewhere for a get rich quick scheme.
  2. Are you only considering this option because you have run out of equity to fund property purchases in your own name or are you genuinely interested in using property as a part of a diversified strategy to meet your retirement income needs. Using superannuation funds means the focus has to be on providing for your retirement and you need to ensure that is the primary intent of the investment.

  3. Would the prospective property investment stand up on its own to a proper assessment of its potential without the tax benefits allowable in this superannuation strategy. If an investment does not stack up under normal circumstances then do you really want to rely on future governments keeping their fingers out of the Superannuation pie to meet your retirement needs!

  4. If you have attended a seminar where you were actually offered a property and if so do you know what commission/fee/marketing allowance the promoter is getting as part of the deal? If you pay $6-$10K to set up the SMSF structure, $10-$20K Stamp Duty and the promoter gets say$17,500 which is 5% on a $350K property then you will need the property to grow by at least 10%-15% before you break even. Currently ANZ in its July Australian Property Housing Chartbook compiled by economists David Cannington, Paul Braddick and Ivan Colhoun.  indicate a 4-5% growth rate would be the most expected over the coming few years.

  5. Are you prepared to do the hard slog yourself and research a decent deal in an area you understand and to ensure you are paying a fair price for a property with rental and growth potential over the longer term.

Property is a great part of a long-term savings portfolio but like every investment you have to do the ground work and the current hype in this area has attracted the spruikers who promise much but deliver little long-term. Seek out the professionals who have an established reputation in the property sector and always do simple things like doing a Google search on  the person or business and the word “scam” or “complaint”.

I hope these thoughts  have been helpful and please take the time to comment if you know of others questions investors should ask as I know this is not an exhaustive list.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Is your SMSF lending money to someone?


Is that loan in your SMSF’s best interest?

The Tax Office issued an information sheet on their website last November warning trustees about the perils of lending an SMSF’s funds to the wrong person. This includes your own business, someone who advises you or a family member or friend.

An all too common occurrence is the practice adopted by some people of withdrawing funds from their SMSF to “temporarily” help keep their business afloat when cash flow is tight.

Has your SMSF loaned money? If so, you need to make sure the loan terms comply with the law and are in the best interests of your funds sole purpose test which is to provide for your retirement.

The boys and girls at the ATO are rightly concerned some trustees are lending money from their fund to people who provide advice or assist in the running of the fund. This may not be in the best interest of your SMSF, and may place your retirement savings at risk. If someone is recommending you set up a SMSF and then to lend them or a related party money for a development, you have to ask yourself in who’s best interest are they working? Might be time to scrutinise the minute details of this “too good to be true one time only opportunity”.

So when would a loan agreement not be seen to be in the best interest of your SMSF ? Basically, when you have given discount loan rates or favourable terms – this could have serious consequences. Here is one example they give:

 when you have given discount loan rates or favourable terms – this could have serious consequences. In addition to putting your member’s benefits at risk, your SMSF could be found to be non-complying and would, therefore, not qualify for concessional tax rates.

They advise that before lending any money, you should consider your fund’s investment strategy and determine whether the investment is appropriate and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of your SMSF.

If you are not sure about making these types of investments choices, they recommend that you seek advice before entering into such arrangements.

If you still decide to go ahead and lend money from your SMSF, the ATO advise that “you should:

  • write an appropriate loan agreement and have it signed by all the parties involved
  • ensure the loan agreement specifies all the terms of the loan, such as:
    • what the security for the loan
    • what is the repayment period
    • when repayments will be paid
    • the amount of the repayments
    • the interest rate
  • ensure the interest and repayments are received by the fund according to the loan agreement
  • take appropriate action to protect the fund’s investment if the loan agreement is not followed
  • ensure the loan is sensible and does not put the members’ benefits at risk
  • ensure that the conditions of the loan agreement do not provide the borrower with favourable terms.

Remember that you are the one ultimately responsible for running your SMSF, and you must make sure you understand your duties, responsibilities and obligations.”

With regards to taking funds out to help your business, you need to firstly know that should the business go under that your Superannuation is in most cases protected in bankruptcy from creditors so you should be careful about accessing this protected asset.

Regardless of how much you trust a person even if they are your accountant, lawyer, financial planner, mortgage broker or best mate, you need to get independent third-party advice. Don’t be embarrassed about not completely trusting the promoters scheme as it is often too late later to get your funds back and hindsight is a cruel tormentor when facing loved ones having lost your retirement nest egg.

For further information on the issues raised in this blog please contact our Castle Hill SMSF Centre or Windsor Financial Planning Office.

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, put on your Facebook page if you found information helpful.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Property through super in a SMSF – Part 1: Background


PropertyFrom the media hype you should already know that self-managed superannuation funds (SMSFs) can borrow funds to purchase assets, provided the borrowing satisfies certain requirements outlined in the Superannuation Industry (Supervision) Act 1993. This can be a very attractive option for SMSF trustees for a number of reasons.

This is Part 1 of a 3 part series. In this first article, we will look at the background to the limited recourse borrowing arrangements that can be used by SMSFs to invest in an asset, specifically a residential or commercial property.

Limited recourse borrowing arrangements

While the Superannuation Industry (Supervision) Act contains a general prohibition against borrowing, SMSF trustees have been able to borrow to acquire assets since September 2007. The Act was further amended in July 2010 with the introduction of new legislation that clarified the intended operation of the borrowing exemption. The rules around the use of borrowed funds for repair and improvement and what is an acquirable asset were further clarified in 2012.

SMSFs may borrow funds to acquire an asset provided the following conditions are satisfied:

1) Single acquirable asset: The borrowed funds must be used to acquire a single asset or a collection of identical assets that have the same market value (which are together treated as a single asset), which the fund would otherwise be permitted to acquire. A single asset could be a parcel of, for example, 1000 ANZ Bank shares, but a parcel of 500 ANZ Bank shares and 500 Woolworth’s shares would not meet the definition of a single asset.

2) Restriction on improvements: The borrowed funds are not to be used to improve the acquirable asset. The ATO recently confirmed its position in relation to repairs vs. improvements of an asset acquired through a limited recourse borrowing arrangement in Self Managed Superannuation Funds Ruling SMSFR 2012/1. For example, if a fire damages part of a kitchen (e.g. the cooktop, benches, walls and the ceiling), the SMSF trustee could use the borrowed funds to restore or replace the damaged part of the kitchen with modern equivalent materials or appliances, but it could not use the borrowed funds to extend the size of the kitchen (as this would be considered an improvement).

3) Beneficial ownership: The acquired asset must be held on a trust where the super fund holds the beneficial interest in the acquired asset. This requires what is known commonly as a ‘bare trust’ or a ‘custodian trust’ to be registered as on the title as the legal owner. This is one of the reasons why the process can get complicated and is the main mistake made in implementing this strategy without doing the groundwork first.

4) Legal ownership: the documentation makes it very clear that the actual beneficial owner is the trustee of the self-managed super fund. After acquiring this beneficial interest, the SMSF has the right to acquire the legal ownership of the asset once it has repaid in full the lending for the property purchase.

5) Limited recourse rights of lender on default: If the fund defaults on the borrowing, the rights of the lender under the arrangement are limited to rights relating to the acquired asset. In other words, the lender’s rights are limited to repossessing and disposing of the asset to recover funds. The lender cannot recover funds from the superannuation fund’s other assets or undertakings. However it can become common practice for the lenders to seek personal guarantees from the trustees in their private capacity to add a layer of protection for the lender

6) Restriction on replacement assets: The acquired asset can be replaced by another acquirable asset (but only in very limited circumstances). For example, the proceeds of a claim after a fire destroys a four-bedroom home could be used to rebuild a four-bedroom home in a newer style but you could not build three town-houses on the same site using the funds.

Types of property that can be acquired

An SMSF can only borrow money to acquire an asset if it would not be prohibited from investing in that asset directly under the Act. This includes residential units, houses, commercial property like office units, industrial warehouses and a current flavour of the day: 7/11 stores! A SMSF is prohibited from intentionally acquiring an asset from a related party of the fund.

The exception, business real property, must be acquired for market value but there are Stamp duty exemptions in some States liked Section 62A of the NSW Stamp Duties act. Business real property is an interest in real property where the property is used wholly and exclusively in one or more businesses. It does not have to be in your own business but it can be and this is why the strategy has been so popular with business people.

The borrowing structure

This diagram shows a typical limited recourse borrowing structure:

Borrowing through SMSF

Funding Options

There are two main funding options available:

1) Related party lending: There is no restriction on you, your family, a related trust, or similar entity lending the money to the SMSF. The benefits of this are that you can avoid costly bank legal adviser fees and other incidental costs of borrowing from a bank. You must follow the suggested ‘Safe Harbour Provisions’ outlined in ATO guidance on related party SMSF loans (LRBAs) . You cannot put in place a loan that is worse in commercial terms for the SMSF.

In any self -funding scenario you have to expect greater scrutiny by the auditor and regulators so as to avoid any compliance issues, SMSF members choosing self-funding should ensure their loan to the fund is properly documented and meets the requirements of the SIS Act. For example, the trustee of the SMSF must ensure that all investments are conducted on an arm’s length basis. This means that a proper lease agreement must be in place, repayments must be scheduled and met and as mentioned above the terms of the loan cannot disadvantage the SMSF in comparison to what’s available in the market.

2) Third party lending: Nearly all the major banks, and some specialised non-bank lenders, have developed SMSF loan packages specifically tailored to meet the requirements of the Act. I really do recommend that you seek advice from a broker who has experience in this area as the terms and conditions offered by the various lenders differ dramatically as some deal with them through their residential lending division and others through their commercial divisions.

The bottom line:  Placing real estate assets into your self-managed superannuation fund can be both straightforward and financially sensible, but there are certain rules you need to follow carefully, In the next instalment of our SMSF session we will guide you through the steps involved in the process from start to finish. Please seek independent professional advice to ensure that any proposed strategy complies with the law, because there are severe penalties that can apply if the trustee gets it wrong.

NEXT STEP : THE PROCESS OF BUYING PROPERTY IN AN SMSF (all states are slightly different but follow these steps to ensure you don’t fall foul of the rules)

As always please contact me if you want to look at your own options. You can make an appointment by clicking here. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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