This is the presentation of the Sept 2010 recorded Webinar on 'thedunnthing' blog, http://thedunnthing.com.

1. Aaron Dunn
SMSF Specialist AdvisorTM
Webinar #2
Wednesday, 29 September 2010
Aaron Dunn
SMSF Borrowing Strategies

2. Housekeeping
• Attendees are muted for the session
• You can type questions to the presenters from
your screen
• PowerPoint presentation and the recording will
be made available to participants after the
session
• Including all Q&A’s from the session

3. About Aaron Dunn
• 15 years within the accounting and financial services industry focusing on
the Self Managed Super Fund industry
• CPA and SMSF Specialist Adviser TM
• Previous role as Head of SMSF Solutions, Snowball Group Limited
• Personally invited by Jeremy Cooper to meet and discuss Phase Three of the
Super System Review
• Part of the ATO Auditor Working Group for Super Simplification
• Regular presenter within the industry and to trustees on SMSFs
• Recently established new specialist SMSF consulting business focusing on
strategic advice, training and education
• Specific technical assistance, helpdesk, in-house SMSF training, webinars/seminars , white-
label content including presentations, newsletters and trustee fact sheets
• Further details to be released in Oct/Nov 2010

4. Disclaimer
This presentation provides general advice only. No direct or implicit recommendations are given in this
document. This means that the general advice provided has not been prepared taking into account an
individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment
needs). You should assess whether the advice is appropriate to your individual financial circumstances
before making an investment decision. You can either assess the advice yourself or seek the help of an
authorised representative through an Australian Financial Services License (AFSL) holder.
Aaron Dunn Pty Ltd, ABN 58 145 331 899 (“ADPL”) believes that the information in this presentation is
correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory
liability which cannot be excluded, ADPL disclaims all responsibility for any loss or damage which any
person may suffer from reliance on this information or any opinion, conclusion or recommendation in this
presentation whether the loss or damage is caused by any fault or negligence on the part of ADPL or
otherwise.

5. Today’s Session
• The rules & how it works
• Recent key changes
• Who’s involved
• Lender options
• Key SMSF borrowing strategies
• Other important considerations

6. Important Dates for SMSF borrowing
Pre 24/09/2007 Section 67(4A) – SIS Act
(24/09/2007 – 06/07/2010)
Section 67A & 67B – SIS Act
(from 7 July 2010)
Three key and distinct dates for borrowing requirements
contained within section 67 of the SIS Act

7. The law (definition)
• Section 67A (SIS Act)
– The borrowings must be for the acquisition of a single acquirable
asset
• Can include expenses in connection with the borrowing
– The asset must be held on trust
– Asset is held on trust so that RSF Trustee acquires a beneficial interest
in the acquirable asset
– Rights of the lender or any other person are limited to the rights
relating to the acquirable asset
– When the borrowing is fully repaid, the Fund has the right relating to
the acquirable asset to become an asset of the SMSF
• Section 67B – Replacement Asset
• Law became effective from 7 July 2010
– Different dates / different rules
– Terminology change – “Limited Recourse Borrowing Arrangements”
not “SMSF Instalment Warrants”

8. How it works

9. Section 67(4A)
The “old” law
Custodian (Bare) Trust
The Custodian could hold a mixed basket of shares, multiple properties, a
collection of paintings, etc.

10. Section 67A & 67B
The “new” law
Custodian (Bare)
Trust
Custodian (Bare)
Trust
Custodian (Bare)
Trust
Custodian (Bare)
Trust
The Custodian can only hold a ‘single’ asset or collection of assets in the
same way that they apply to a single asset (e.g. #1000 BHP shares)

11. Key changes introducing sections 67A & 67B
• A single asset or a collection of identical assets
– A parcel of identical shares in a single company or units in a unit
trust that have the same market value. For example, #1,000 BHP
shares.
• Note - any collection of assets must be bought and sold as a
collection; there can be no partial sell-down, DRP, etc.
– The land and house/building for any real property acquisition.
• Furnishings/Non-fixtures not included. Would require a separate
borrowing.
• Issue – what about apartments / office buildings where a car park(s)
are held on separate title?
• The use of personal guarantees are allowed, however the rights
of the lender and any other person against the Fund Trustee are
limited to the acquirable asset
– Protection against claim on other fund assets

12. Key changes section 67A & 67B (cont)
• Ability to now refinance existing loans
– Associated expenses can be included as part of borrowing
• e.g. Stamp duty, conveyancing, brokerage, loan establishment costs
– A re-negotiation of a borrowing with the same lender with
no changes in conditions can occur is not a refinance
• Section 67B - Replacement Asset
– Examples of what does not qualify:
• sold BHP shares and buy CBA shares (as part of change to
investment strategy), property improvements (development),
property subdivision
• What is a repair versus what is a capital improvement?
– Can use borrowings to maintain or repair to ensure it is
‘functional’ (but not improve)

13. The parties involved
Client Finds property, seeks finance (agent, buyers
advocate)
Lender Structures and provides finance
Lawyer Create Custodian Trust (bare trust), documentation
for LRBA, conveyancing (property)
Financial Planner Financial Product considerations, Investment
Strategy, Insurance
Accountant /
Administrator
Fund Administration, Annual Return & Reporting
Auditor Financial and Compliance Audit

14. Lender Options
• Banks providing SMSF Loans
• Residential – up to 80% LVR
• Commercial – up to 70% LVR
• Standard lending rates applying
• Be-Your-Own (“BYO”) Lender
• Redraw using existing equity
• SMSF JV
• Special purpose SMSF for business partners / joint
investors

15. Lender to
SMSF
Custodial
Trust
(Bare Trust)
SMSF
Tenant
(inc. related
party)
(1). Member redraws on equity in
own home to provide a loan to
his SMSF
(2). SMSF borrows
money from related
party (i.e. member)
on arms-length basis
(3). SMSF acquires
property in name of
Custodial Trustee
using a LRBA
(4). Lender’s rights
and any other person
in the event of default
are limited to the
property only.
(5). Lease agreement between SMSF
and tenant (can be related party for
commercial property)
(6). Rent paid
to SMSF as
beneficial
owner of
property
(7).
Repayments
made by SMSF
back to lender
(principal
and/or
interest) –
subject to
terms of loan
(8). Lender makes
repayments back to
own bank where
money originally
drawn.

16. Key SMSF borrowing strategies
• Five key strategy areas to discuss in using limited
recourse borrowing arrangements within a SMSF:
1) Business owners renting or wanting to upgrade
2) Business premises held outside of super
3) Residential and Commercial Property Investors
– National Rental Affordability Scheme (NRAS)
4) Property development
5) Pre-retirees who are planning a sea-change

17. Targeting Clients - #1 + #2
• Business Owner/Operator
• Can borrow to acquire or transfer commercial premises
within an SMSF
• Regardless of existing borrowings outside of super for existing
premises
• Ability to utilise various super and tax strategies to reduce
or eliminate any CGT.
• Restructuring of arrangements can eliminate existing non-
deductible debt
Strategy target age – 35+

18. The Family Home
• Family home = $700,000
• Debt = $300,000 (not deductible)
• potentially used as business security
The Family business
• Run a successful widget business.
• Business premises held in family trust
• asset protection
• Factory Valued at $600,000
• Debt of $200,000 (deductible)
• Rental agreement (business & trust)
John & Jane
Existing
Superannuation
John = $150,000
Jane = $100,000
Case Study
The power of the SMSF &
Borrowing Rules
Widget Co.
Pty Ltd
(business)
Family Trust
Rent
Security
Security

19. John & Jane
John & Jane SMSF
John = $150,000
Jane = $100,000
Borrow = $350,000
(LVR 70%)
Case Study
The power of the SMSF &
Borrowing Rules
Widget Co.
Pty Ltd
(business)
Family Trust
Rent
Security
Custodian
(Bare) Trust
Asset held on
trust via
Custodian
Arrangement
Outcomes for John & Jane
• SMSF borrows money and holds
asset via Bare Trust
• Transfer of BRP into SMSF
• No CGT (SBC)
• ‘going concern’ (no GST)
• Dutiable (purchaser)
• Family Trust receives $600k
• payout FT debt ($200k)
• John & Jane payout $300k home loan
• Further $100k to invest (can contribute
back into super)
• 100% deductible debt for SMSF,
being made from deductible super
and rental payments in business
• Future growth of property – no CGT
(if sold post retirement)
Personal
Guarantee

20. Targeting Clients - #3
• Property Investors (residential or commercial)
• Need to consider
• Yield
• Capital growth
• LVR
• Bank or BYO lender
• Ability to contribute to super / servicing
Strategy target age – 35+

21. NRAS Example
• Greg (53) & Penny (48) are looking to buy a property (via
development) using an SMSF limited recourse borrowing.
– Considering NRAS approved property
• Making maximum contributions into super
• Off-the-plan, 12 months to build
• Melbourne Bay side apartment – 2 bedrooms, 2 bathrooms, 1
car
• Purchase Price – $355,000
• Market Rent – $320 per week
• NRAS Reduced Rent (80% of market) – $256 per week
More info:
http://www.fahcsia.gov.au/sa/housing/progserv/affordability/nras/Pages/nras_info_invest.aspx

22. NRAS Case Study
Super Fund Rental with Limited
Recourse Loan
NRAS with Limited
Recourse Loan*
Annual Rent $18,720 $13,312
Taxable Contributions $75,000 $75,000
Assessable Income $93,720 $93,720
Less: Interest deduction ($17,395)* ($17,395)*
Taxable Income $76,325 $76,325
Tax @ 15% $11,449 $11,449
Less: NRAS Tax Offset $0 ($9,140)
Tax Payable $11,449 $2,309**
Effective tax rate 15% 3.03%
* Assume limited recourse loan at 70% LVR of purchase price; interest rate at 7%
** Tax Offset allows for $60,933 of taxable contributions

23. Targeting Clients - #4
• Property Development
– Can acquire land and/or property to develop
– Preferably done using a related unit trust (SISR 13.22C)
– Unit Trust is the developer; SMSF is a contributor of capital to
the trust (in full or part)
• ATO have no concerns with strategy as it meets requirements of the Act
• Need to get capital in up-front or else need another bare trust for
further borrowings
– Banks unlikely to provide lending, need to “self-fund” (BYO
lender)
• No charge or borrowings within the Unit Trust, bank unlikely to be
happy with security solely over units in unit trust (even with personal
guarantees)?

24. Lender to
SMSF
Custodial
Trust
(Bare Trust)
SMSF
Tenant
(inc. related
party)
(1). Redraws on equity in own
home to provide a loan to SMSF
(2). SMSF borrows
money from related
party on arms-length
basis
(3). SMSF acquires in
ungeared unit trust units in
name of Custodial Trustee
using a LRBA
(4). Lender’s rights in
the event of default
are limited to the
property only.
(5). Lease agreement
between SMSF and
tenant (can be related
party for commercial
property)
(6). Rent paid to
Unit Trust
(8). Repayments
made by SMSF
back to lender
(principal and/or
interest) – subject
to terms of loan
(9). Lender makes
repayments back to
own bank where
money originally
drawn.
Ungeared Unit
Trust (SISR
13.22C)
(7). Distribution
paid to SMSF as
beneficial owner
of units in unit
trust
(4). Unit Trust acquires
land and uses additional
funds to develop site

25. Planning a sea
change?
Targeting clients - #4

26. A home to retire
• Sea-change, country home or downsizing
• SMSF can acquire now using a limited recourse
borrowing
• Third party rent arrangement until retired
• Can’t be used by the members or relatives (sole purpose test)
• Sell own home and move into ‘new’ home
• No CGT on transfer when in pension phase
• Tax-free in-specie lump sum (>60 tax free);
• Contribute proceeds of principal residence to replace asset
value (subject to age and caps)
• No stamp duty*
• Need to consider relevant state stamp duty requirements
• Strategy target age – 50+

27. Important Considerations
• Stamp duty – only pay it once!!
– Know the rules in your state
• Trust Deed and supporting documentation
– What does the deed say about borrowing arrangements and investments
held in custody for the fund
– What does the lender require?
• Insurance
• Acquisition of assets from related party rules
• In-house Asset
• Arm’s length dealings (ATO ID 2010/162)
– Related party lending at lower than commercial rates?

28. Webinar Timetable
Date Topic
Late August 2010 HNW SMSF Strategies (Available online)
Late September 2010 Limited Recourse Borrowing Arrangements
Late October 2010 Property investment strategies using a SMSF
Late November 2010 SMSF Death Benefit Nominations
* Recommence in early February 2011, with sessions running every 6 weeks
Email me at thedunnthingblog@gmail.com regarding topics of interest

29. Thank you
• A link to access this Webinar and
PowerPoint presentation will be
emailed to you shortly once it is
uploaded
• My contact details:
Aaron Dunn
0488 055 836
thedunnthingblog@gmail.com
http://thedunnthing.com
http://www.twitter.com/azad75
v http://au.linkedin.com/in/azad75
Coming soon… The SMSF Academy
•Specialist SMSF advice
& assistance
•Technical Consulting
SMSF
Advice &
Consulting
•In-house Training
•Seminars/Webinars
•Content delivery
•White-label solutions
SMSF
Training &
Education