Self Managed Super Funds – Borrowing Through Limited Recourse Loans
In September 2007 amendments were made to the Superannuation Industry (Supervision) Act 1993 allowing self-managed superannuation funds (SMSF) to enter into what is referred to as a “Property Warrant” in order to obtain a loan to purchase property.
This arrangement allows a SMSF to borrow money in order to purchase property. This had previously not been allowed. Accordingly this broadens the investment potential of your SMSF.
The arrangement works through creation of a trust, often referred to as a Bare Trust, of which the SMSF is the sole beneficiary. The trustee of the Bare Trust then uses cash funds from the SMSF and a limited recourse loan to purchase the property which it will hold solely for the benefit of the SMSF until such time as the SMSF makes one or more payments in order to have the mortgage over the property released. At this point the SMSF can then request the Trustee of the Bare Trust to transfer the property to the SMSF.
The set-up of this arrangement therefore involves the following:
- Review and, if required, amendment of the SMSF Trust Deed to ensure that the SMSF has all powers in order to enter into such arrangement;
- Creation of a company to act as trustee for the Bare Trust; and
- Creation of the Bare Trust.
Visually the arrangement looks something like this:
New Company Trustee Eg. Bailey Property Co Pty Ltd
Is the Trustee of…
Bare Trust Eg. Bailey Property Trust
The Sole Beneficiary of Bare Trust is..
Superfund Trustee – Bailey Superannuation Pty Ltd
Who is the trustee for….
Superfund – Bailey Super Fund
However, there are a number of things to be aware of:
Set Up and Purchase
This arrangement must be set up before you enter into a Contract to purchase any property. Therefore the first step is to discuss the arrangement with your accountant and solicitor.
Only certain banks are currently lending under these arrangements and the lending ratios vary from bank to bank. We usually see lending on around 60%. Therefore the SMSF will need to have sufficient cash funds to cover 40% of the purchase price plus costs.
The costs of establishing the company, property trust, amending your SMSF deed, conveyancing fees, bank fees and other advice fees can add up. Therefore it is important that you do your figures to ensure that the arrangement will benefit the SMSF. This includes rental income and expenses on the property throughout the loan term. Advice should be sought from your accountant before set up.
Limited Recourse Loan
Rights of the lender must be limited to the property only i.e. the superfund assets cannot be exposed to the Lender.
The same asset rules apply to this arrangement as to any other SMSF investment.
There are some particular requirements to be met in respect of personal guarantees to be supplied to the Lender. Therefore guarantors must waive their rights of indemnity against the SMSF. Specific documents are required to be drafted for this purpose.
Capital Gains Tax Issues
When the loan is repaid and the property is transferred to the SMSF there is a possibility that this transfer may trigger a capital gains tax event thereby incurring a capital gains tax liability. The position on this issue is still somewhat unclear due to the fact that not many of the loans from these arrangements have been paid out yet. You should seek specialist accounting advice on this issue.
Stamp Duty Issues
As with the capital gains tax issue above there may also be stamp duty payable on the transfer to the SMSF at the end of the arrangement. This may result in payment of stamp duty upon entering into the arrangement and then again upon winding up of the arrangement when the property is transferred to the SMSF. This issue is currently being looked at by the Commissioner. You should seek specialist legal advice on this issue.
This Blog is intended to provide general information only and has been prepared without taking into consideration any particular person’s objectives, financial situations or needs. Before acting on this information you should consider the appropriateness of this information having regard to your own personal objectives, circumstances and needs.