SMSFs and Borrowing


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In August 2009, Cleardocs hosted seminars in Melbourne and Sydney focusing on SMSF borrowing through instalment warrant arrangements.

The Seminars were presented by Julian Smith, a partner at Maddocks - and in Melbourne, by Fiona Da Silva from St George Bank, and in Sydney, by Wayne Scott from NAB.

Series of video clips are also available at

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SMSFs and Borrowing

  1. 1. Breakfast Briefing: SMSFs and Borrowing Maddocks | Cleardocs | St George August 2009
  2. 2. Agenda <ul><li>Defining ‘Instalment warrants’ </li></ul><ul><li>Key structural requirements </li></ul><ul><li>Key documentary requirements </li></ul><ul><li>The banks’ perspective – commercial considerations </li></ul><ul><li>Compliance imperatives and risk </li></ul><ul><li>Summary and practical tips </li></ul>
  3. 3. Defining instalment warrants / ‘instalment warrant arrangements’ <ul><li>‘ Instalment warrant’ – the ATO view (extract) </li></ul><ul><li>What are they really? </li></ul><ul><ul><li>arrangements using limited recourse lending </li></ul></ul><ul><ul><li>complicating factors </li></ul></ul><ul><ul><li>the basic s67(4A) requirements </li></ul></ul>
  4. 4. Structural requirements – Bank lending Diagram 1 Bank loans funds to SMSF
  5. 5. Structural requirements - Non-bank lending Diagram 2 Related party loans funds to SMSF
  6. 6. Structural and documentary requirements <ul><li>The SMSF deed </li></ul><ul><li>The custodian </li></ul><ul><li>The custody deed </li></ul><ul><li>Loan agreements </li></ul><ul><li>Mortgages, guarantees and other security </li></ul>
  7. 7. Lending to SMSFs <ul><li>Who can borrow? </li></ul><ul><li>Property Custodian </li></ul><ul><li>Loan Purpose </li></ul><ul><li>Types of Loans </li></ul><ul><li>Minimum Loan amount </li></ul><ul><li>Loan terms </li></ul><ul><li>Repayment arrangements </li></ul>
  8. 8. Securing the Loan <ul><li>What is acceptable security? </li></ul><ul><li>What is unacceptable security? </li></ul><ul><li>Loan to Valuation Ratios </li></ul><ul><li>Security Structure </li></ul>
  9. 9. Servicing the Loan <ul><li>SMSF must be able to service the proposed loan from existing and proposed investment income and member contributions. </li></ul><ul><li>Existing SMSF Investment income @ 100% </li></ul><ul><li>Proposed Rental Income @ 80% </li></ul>
  10. 10. Servicing the Loan <ul><li>Member Contributions @ 80% </li></ul><ul><li>What about Member Guarantees? </li></ul>
  11. 11. Case Study 1 – Commercial <ul><li>Client has identified a commercial property to purchase </li></ul><ul><li>Purchase Price is $1,000,000 </li></ul><ul><li>Property Custodian is set up </li></ul><ul><li>Purchase fits clients investment strategy </li></ul><ul><li>How does the Bank fund the transaction? </li></ul>
  12. 12. Case Study 1 – Security <ul><li>1 st Registered Limited Recourse Mortgage over Commercial Property given by Custodian </li></ul><ul><li>Guarantee limited to facility expressly excluding right of indemnity against the SMSF & SMSF Trustee given by Custodian </li></ul>
  13. 13. Case Study 1 – Security <ul><li>Maximum loan amount $580,000 (LVR 58%*) </li></ul><ul><li>Funds required to be provided by client is $420,000 plus costs </li></ul>
  14. 14. Case Study 1 – Income <ul><li>Real estate agent has advised that a lease in place of $80,000 p.a. </li></ul><ul><li>After equity required for purchase, client will have $200,000 of other assets in the SMSF earning 3.00% p.a. </li></ul><ul><li>Member contributions for the past 3 years have been $50,000 </li></ul>
  15. 15. Case Study 1 – Serviceability <ul><li>Rental Income $80,000 @ 80% $ 64,000 </li></ul><ul><li>Investment income $200,000 @ 3% $ 6,000 </li></ul><ul><li>Contributions $50,000 @ 80% $ 40,000 </li></ul><ul><li>TOTAL INCOME $110,000 </li></ul>
  16. 16. Case Study 1 – Serviceability (cont) <ul><li>Repayment commitments </li></ul><ul><li>Interest $580,00 @ 7.00% = $ 40,600 </li></ul><ul><li>Interest cover (min 1.50x) 2.71x </li></ul>
  17. 17. Key Messages <ul><li>Don’t push boundaries, be prudent </li></ul><ul><li>Consider future needs and flexibility </li></ul><ul><li>Talk to your lender early </li></ul>
  18. 18. Compliance Imperatives and Risk <ul><li>Investment strategy: debt and distortion </li></ul><ul><li>Interest </li></ul><ul><ul><li>Greater than commercial rates </li></ul></ul><ul><ul><li>Less than commercial rates </li></ul></ul><ul><ul><li>Capitalising </li></ul></ul><ul><li>Personal guarantees: the bank’s additional security </li></ul>
  19. 19. Compliance Imperatives <ul><li>SIS Act Requirements and Prohibitions </li></ul><ul><ul><li>Related party transactions – s 66 </li></ul></ul><ul><ul><li>In-house asset rules – Part 8 </li></ul></ul><ul><ul><li>Arm’s length dealings – s 109 </li></ul></ul><ul><ul><li>Prudence and standard of care – s 52 </li></ul></ul><ul><li>Trust deeds </li></ul>
  20. 20. Compliance Imperatives <ul><li>Risk analysis example: </li></ul><ul><ul><li>There is additional risk where debt and non-compliance are combined </li></ul></ul><ul><li>ATO issues still outstanding </li></ul>
  21. 21. Other (Non-super) Considerations <ul><li>Stamp duty: </li></ul><ul><ul><li>on custody deed </li></ul></ul><ul><ul><li>on the transaction </li></ul></ul><ul><ul><li>exemptions on transfer to SMSF </li></ul></ul><ul><li>GST </li></ul><ul><li>Trusts law </li></ul><ul><li>Financial services </li></ul>
  22. 22. Practical Ti ps <ul><li>Know the basics, the opportunities, the limits </li></ul><ul><li>Raise the issue early with the bank </li></ul><ul><li>Raise the issue early with the conveyancing lawyer </li></ul><ul><li>Keep in mind the importance of compliance </li></ul>
  23. 23. SMSFs and ‘Instalment Warrant Arrangements’ Questions
  24. 24. Breakfast Briefing: SMSFs and Borrowing Julian Smith Christopher Balmford Maddocks | Partner Cleardocs | Managing Director Direct 61 3 9240 0864 Direct 61 3 9429 8944 [email_address] Fiona de Silva | Senior Manager, Industry Segments, St George Bank Direct 61 3 9274 4826