Borrowing Strategies for SMSF using Fixed Unit Trust structure - Two or more SMSF borrowing from a related party
Research house Investment Trends found that last year 29,000 do-it-yourself superannuation funds borrowed money and estimates that 40 percent more will borrow this year. The research also found that most common reason for borrowing was to acquire business premises. A SMSF can either borrow from a bank or use a related-party loan, or a combination of the two.
It is relatively easy for one SMSF to borrow and you can refer to our website (SMSF Tools > Bare Trust or click here) on how to stitch a deal using a bare trust. But sometimes two (or more) business partners need to get together and borrow together using their SMSF to purchase their common business premises by using related party lending. Click here for the structure on how to put this deal together.
This structure is complex and an advisor need to consider the following issues before implementing for their clients
1. Borrowing rule - Section 67
2. Charging rule - Regulation 13.14
3. Sole purpose test - Section 62
4. Investment strategy - Section 52(2)(f)
5. Related party acquisitions - Section 66
6. Arm's length dealings - Section 109 if the vendor or tenant is a related party
7. In-house asset rule - Section 71 & 83
If you would like to know more on how to put this structure together for your clients, feel free to phone our Superannuation Technical Director, Mr Manoj Abichandani SSAŽ SSAudŽ.
Land Tax threshold - Our Fixed Unit Trust is approved by NSW OSR and is only for $275 Incl. GST- why pay more?
Benefit of using a Fixed Unit Trust over a normal unit trust is that if land is situated in NSW, your SMSF will be entitled to its own Land Tax threshold as our fixed unit trust is approved by the NSW OSR to be treated as a Fixed trust under Section 3A(3B) of the Land Tax Management Act 1956.
Click here to download OSR letter of approval.
Click here to learn more about our Fixed Unit Trust Deed.
Bare Trust now only $275 Incl. GST
To assist those trustees of SMSF who want to borrow, we have reduced price of our Bare Trust Deed where a bank is a lender from $660 to $275 Incl. GST, this price includes time of SMSF Specialist Advisor Manoj Abichandani SSAŽ SSAudŽ to help you and your client to complete the purchase. Our bare trust has been used over 400 times to borrow from NAB, Westpac, BOQ, Rocks Building Society, St George Bank etc..
Click here to learn more on how your SMSF can borrow.
Section 66 - Acquiring assets from related party - No Stamp Duty to be paid by SMSF when acquiring "business use property" from members
Section 62A of the NSW Duties Act was amended last year, so that only $50 fee applied at the time of transferring property from member(s) to the trustee(s) of the SMSF.
Condition of this section is that the transferor is the only member of the superannuation fund or the property is to be held by the trustee of the superannuation fund solely for the benefit of the transferor, and the property is to be used solely for the purpose of providing a retirement benefit to the transferor.
Hence, if the property was held by one member and if the fund had two members a declaration has to be provided that the property will be segregated for the benefit of that particular member. Further, this stamp duty exemption will not apply if the property is held by individuals who are not members of the SMSF (property held by 5 members etc) or if a company or a trust is the owner of the property.
Lastly, properties that have a lien cannot be transferred to the SMSF as under Section 67(1) of SISA a SMSF cannot borrow.
Transfer to the custodian of the trustee of the SMSF - Section 62A (3) of NSW Duties Act
Under section 67A & 67B of the SISA a SMSF can borrow to purchase a property under limited recourse borrowing arrangements. Some of the condition of this arrangement is that the acquirable asset is held on trust so that the SMSF trustee acquires a beneficial interest in the acquirable asset; and the trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest; and the rights of the lender or any other person against the SMSF trustee for, in connection with, or as a result of, (whether directly or indirectly) default on the borrowing; or the sum of the borrowing and charges related to the borrowing are limited to rights relating to the acquirable asset.
The trustee of the trust which holds the property for the trustee of the SMSF acts as custodian for the trustee of the SMSF.
From 1st January 2011, duty of $500 is chargeable on a transfer of, or an agreement to transfer, dutiable property from a person (the transferor) to the custodian of the trustee of a SMSF, if the transferor is the only member of the superannuation fund, or the property is to be used solely for the purpose of providing a retirement benefit to the transferor.
This means members who own "business use property" (see SMSFR 2009/1 for what is a "business use property" - especially residential property examples 14 and 15) who have a loan on the property can now transfer these properties to their SMSF whilst the SMSF borrows. This could be an excellent strategy for members approaching pension phase.
Click here to learn how to commence an Account Based Pension in a SMSF.
Care should be taken when the property is either sold to the SMSF or acquired by the SMSF via concessional or non-concessional or once a lifetime CGT contributions as any contribution above the cap amount can result in additional tax. Lastly, any transfer is a CGT event for the member and all valuations used must be at arms length (Section 109 SISA).
Sent by :-
Manoj Abichandani SSA SSAud
SMSF Specialist Advisor
SMSF Specialist Auditor