10 top traps to avoid in SMSF gearing
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Peter Townsend is principal of Townsends Business and Corporate Lawyers.
SMSF (self-managed superannuation fund) trustees will show even stronger interest in borrowing for direct property in their portfolios in 2013.
However, we continue to notice a number of mistakes or poorly developed approaches commonly being made in the borrowing process by trustees and their accountants and advisers.
The SMSF loan under s.67A of the SIS Act is not an ordinary loan. It takes careful planning to get the loan correctly settled, not only in order to guarantee compliance with the superannuation legislation but also with a view to the stamp duty issues.
It is particularly important to ensure that any subsequent transfer of the property from the holding trustee to the SMSF trustee when the loan is repaid attracts only nominal stamp duty. Watch out for these 10 traps.
Trap 1: Failing to understand lender's requirements
Because SMSF lending is functionally different from ordinary property lending, SMSF advisers and their trustee clients cannot make any assumptions about what lenders are looking for from them.
Carefully check with the lender as to what requirements they have for SMSF limited recourse loans. Remember that banks and brokers are learning just as fast as everyone else is in this area. Trustees should expect closer scrutiny than ordinary property loans because the lender is offering limited recourse terms.
The lender will likely want proof that the fund deed provides the necessary power to borrow. An update of the trust deed may be needed if the trust deed has not been amended since the legislation was introduced in September 2007 or materially revised in July 2010.
Will the lender require the member to agree to a particular contribution program to ensure sufficient money in the fund to meet any shortfall in income from the property? If so, has the trustee considered whether that program will be possible and advisable?
Will the lender require sign off by the fund's accountant, financial planner and lawyer before proceeding? Will the lender require personal guarantees? Can the members provide guarantees and remain compliant?
Will the bank require that the SMSF trustee and/or the holding trustee be companies? Where the fund is buying business real estate from a related party, will the bank expect to see a full contract (arguing s.109 of SIS) rather than simply a transfer document?
Be sure you have carefully considered all the lender's requirements before proceeding.