SMSF Borrowing before the Ban
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This document contains information from two experts at Business Depot regarding SMSFs and property investments. The first expert discusses the likely changes to SMSF borrowing arrangements following the Financial System Inquiry, including a potential ban on related party loans and limited recourse borrowing arrangements. The second expert outlines how an SMSF can structure a property investment using a limited recourse loan and borrowing trust. Key steps like setting up the SMSF corporate trustee, borrowing trust and property ownership are summarized. Risks around liquidity, diversification and future legislation are also mentioned.
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SMSF Borrowing before the Ban
- 2. Head of Tax & Super - Building & Construction - Property - Small to medium business m.garrone@businessdepot.com.au (07) 3193 3002 0404 869 255 @mgarrone
- 3. • What likely to happen to existing arrangements • What is involved if you are borrowing • What are the steps from contract to settlement • What do you need to consider at settlement & in the future • Our practical experience
- 7. • SMSF here to stay • Growing, healthy, vibrant area • Competition – SMSF & Super market • Professionalism growing • Innovation – cloud, advice, offerings
- 12. • Structural risk – GFC 2008 & future shocks • Super 2nd largest asset [behind home] • Benefits individuals / economy as a whole [stabiliser – avoid age pension] • Limited recourse in name only – eg, PG’s, risk to other assets
- 13. • Lack of diversification [risks increased] • BUT noted borrowing still relatively small [future risk] • RBA/APRA want leverage limited [risks incompatible with objective of savings vehicle for retirement]
- 16. • Old problems back • Property industry growth profile – RBA heavy lifting • Difficult economic environment
- 17. • Ban likely • Limited recourse in name only
- 18. • LVR rules • No related party loans • SMSF Corporate trustee required • Diversification / liquidity rules • Ban PG’s
- 19. • 31 March 2015 FSI submissions close • April to May budget night • Complicated by (i) Lack of political capital (ii) Tax white paper
- 20. • Terminate existing arrangements [unlikely] • Grandfathering – likely (i) Pre 99 unit trusts – 10years and ongoing [possible to have in place - just less flexible] (ii) July 2010 borrowing changes
- 21. - Timing restriction – difficult as long term 10-30 years - Maintain borrowings – what does that mean – refinance? - Loan refinance? - Backdating of legislation [unlikely]
- 22. • ensure settled by 31 March 2015 [Safest] • Under contract but not settled [Caution] (i) Conditional subject to finance (ii) Unconditional [risky] (iii) Careful [if long settlement or off the plan] (iv) July 2010 changes – when loan contract signed
- 24. Consider: • Age • Liquidity • Diversification • Overall situation
- 25. Wait until suitable property found? • Set-up in advance? • Timing on rollover? • Insurance required?
- 26. • Ensure deed allows borrowing • SMSF Corporate trustee in place – change assets over, eg, shares, property, bank accounts
- 27. • Borrowing – Bank indication of lending limits • Balance – SMSF (i) Own cash (ii) Contributions (iii) Existing assets liquidated • Make sure you can execute on plans
- 28. • Find suitable property • Review property with advisors (i) likely cash outflows – eg, repairs, improvements (ii) single acquirable asset? (iii) understand likely property plans/options in the future
- 30. • Name on contract “Company Pty Ltd as trustee for Borrowing Trust” • Insurance on property – name? • Form day before going to contract?
- 31. • Stamp duty issues if SMSF doesn’t pay deposit • Can you get your own deposit back? • What if you cannot get you deposit back?
- 32. • 45 days to settlement [subject to finance] • 60 days if no SMSF set-up [abn, rollovers, insurance] • Don’t forget potential ban / legislation changes • Why not 30 days?
- 33. • Liquidity • Diversification • Risk/Return • Existing strategy – full update?
- 34. • SMSF Deed • Borrowing Trust • Property • Lending – eg, capacity to repay and lvr’s
- 35. • GST registration, if required [easily forgotten] • Do earlier or only just before settlement?
- 36. • Limited recourse loan to SMSF • Cash from SMSF • Contributions (what if settlement doesn’t go through?) [easy to see mistakes on settlement – cash instructions required if more complicated – care required with timing]
- 37. SMSF Specialist - SMSF advice - Real estate guru - SMSF Association specialist m.kelly@businessdepot.com.au (07) 3193 3020 @megankelly @megankelly
- 39. • Lease with instalment trust – assigned or new lease • Use ABN/TFN of SMSF • Rent deposited to SMSF [use SMSF bank account] • SMSF pays expenses • BAS – if GST applicable [quarterly]
- 40. • Financial Statements [SMSF only] • Audit [slightly higher costs]
- 41. • Transfer to SMSF [leave some debt in place?] • No CGT? • No GST? • No stamp duty? [who paid deposit & more]
- 61. • Cloud – Class Super & Apps (i) costs (ii) benefits – reporting & interaction [online access – you & your advisor]
- 62. • Borrowing ban / changes • Murray FSI – lot more then Super (i) Tax free pensions & withdrawals > 60? (ii) Franking credit changes? (iii) SMSF Corporate trustee mandated?
- 65. • Self managed Super • Property • Structuring • Strategic Advice • Retirement planning • Estate Planning
- 67. @business_DEPOT businessdepot businessdepot.com.au m.kelly@businessdepot.com.au (07) 3193 3020 k.thompson@businessdepot.com.au (07) 3193 3052 a.neuendorff@businessdepot.com.au (07) 3193 3021