Purchasing Property via instalment warrant arrangement gets a tick from ATO and APRA

 
ATO has finally cleared some doubts in relation to installment warrants by releasing two documents on Friday 4^th April 2008. Link to the documents are at the bottom of this article.

These documents now give ATO's and APRA's

opinion on what concerns they have on the instalment warrant arrangements that complies with the new rules, these concerns are:

1.     Non recourse nature of loan - where borrowing from the lender is guaranteed by SMSF member or a related third party

2.     Existing loans in SMSF - where the installment warrant is created for re-financing a current borrowing

3.     Loan increases with time - where the borrowing permits capitalisation of interest

4.     Further borrowing for the same asset - where the loan is taken in multiple drawdowns from a single loan facility.

5.     Although the borrowing from a related party, such as a member may be acceptable, but where the interest rate for the borrowing is zero or less than a commercial rate, the ATO may consider this borrowing as additional contribution and where the interest rate for the borrowing exceeds commercial rates, the ATO may consider this borrowing not meeting the sole purpose test

ATO and APRA Tick

 
The good news is that by releasing these two documents the ATO & APRA have given confidence to trustees who were intending to get into such arrangements that the new law is here to stay, perhaps, to aid the ailing property shortages for tenants of residential property.

 
Overall the above two documents confirm that as long as you have the correct arrangement in place plus ensure that the trust deed allows purchase of property in instalments and SMSF's investment strategy is reviewed, purchasing property with SMSF funds via instalment warrant is OK.

 
Further, when all the instalments are paid (loan repaid) the asset can be transferred from the custodian trustee to the SMSF as ATO will not consider the custodian trust a related entity and trustees of SMSF will not be infringing in-house asset (purchasing property from a related entity) rules.

 
Please note that trustees cannot sell their own residential properties to their SMSF and cannot live in the property owned by their SMSF.

Warning

If you are an advisor or a trustee contemplating to purchase a property in your SMSF via this structure, please note the following

You must do a cash flow analysis of rent vs interest and other expense - as these loans are not cheap and as per our calculations properties become neutrally geared only when LVR is as low as 55% -  which means that SMSF must have at least 45% equity + costs (such as stamp duty, structure and advise).

• If the above LVR cannot be achieved then trustees should be 100% sure that the SMSF will need further contributions to fund the shortfall of interest over rent - further, if new contributions are only sufficient for interest shortfall - the loan can never be retired whilst the property is held
   
  by the SMSF. That means the property is held for only capital gain and not wealth creation, which may or may not happen.

• Any new contributions used for interest payments within SMSF will not pay any tax - hence the deduction for contributions could potentially be 100% of salary sacrifice - what that means is if the taxpayer implements salary sacrifice strategy and if the member is on the highest marginal tax rate - the deduction available to salary sacrifice is 46.5%!

• If property is neutrally cash geared and all contributions will be used to retire debt - no tax on contributions is payable on depreciation amount of property (see above point)

Cost of Property instalment warrant

 
We have noticed that many operators have come on the market and are charging as much as 3% ($15,000 for a $500K property) + $5,000 costs (SMSF trust deed + Security trust and trustee company etc) just for the ability to enter into such an arrangement.

These marketers make more money when they act as mortgage brokers and  real estate agents - visit www.equiti.com.au  or www.deploygroup.com www.quantumwarrants.com.au just to name a few.

Our Documents

Your other option - Do it yourself Instalment Warrants - our documents (to be released soon)

1) SMSF trust deed which allows                              $110

    purchase of an asset in instalments          (Available now)

 2) Security Trust

• Instalment warrant
• Minutes of the meeting                                 $1650
• Investment Strategy Review        (Available in May 08)
• Instructions - what to do next

 3) Trustee Company (instantly emailed)                    $475

   (email - including ASIC Fee)                (Available July 08)

 
4) Loan Agreement & Mortgage Document               $660

                          
5) Lease Agreement - Business Property            $330            

    (In case of Arms Length Tenant)        (Available in May 08)

 6) Conveyancing Via our Solicitors             $1650

    (Batallion Legal)                                  (Available now)

 ­­­ATO Documents

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1) Taxpayer Alert TA 2008/5 - Certain borrowings by self managed superannuation funds

Click here

2) Instalment warrants and super funds - questions and answers

Click here

FIRST TRUST DEED  FREE