SIG Meeting May 5th 2008 - Self Managed Super Funds and buying Property

[ziggy2214]

Mike

Question pls

Lets say we've used our SMSF to buy an IP and still have $200K left over.

Can we use those $200K + our employer contributions to cover the shortfall for the next 10 years or so?

Also, if we have reached serviceability outside super how do we overcome this problem?

Can the remaining super funds be considered as our ability to service the loan?

Many thanks

 

[MikeF]

Hi Ziggy

Serviceability/repayment capacity for SMSF borrowings is assessed using the income of the SMSF (investment income less capital gains) plus members contributions plus rental income of the proeprty to be purchased.

The question of whether $200K sitting in a SMSF cash account would be taken into account may be difficult to get through as a lender may say if serviceability is tight, to throw in more equity/reduce LVR.

Then again they may be happy to consider if the overall position can be justified.

My take would be to give it a try.

 

[MikeF]

Hi Guys

Some one from Monday nights SIG meeting sent me a message to send them a copy of the loan comparison calculator, unfortunately I've accidentially deleted the message and can't remember who it was. Sorry.

Can that person please resend the request and I'll make sure I don't delete it this time.

Regards

 

[ziggy2214]

Hi Ziggy

Serviceability/repayment capacity for SMSF borrowings is assessed using the income of the SMSF (investment income less capital gains) plus members contributions plus rental income of the proeprty to be purchased.

The question of whether $200K sitting in a SMSF cash account would be taken into account may be difficult to get through as a lender may say if serviceability is tight, to throw in more equity/reduce LVR.

Then again they may be happy to consider if the overall position can be justified.

My take would be to give it a try.

Mike
Many thanks
I ask about using leftover funds because sometime down the track I might decide to stop working so I won't have employer contributions.
Cheers

 

[MikeF]

Mike
Many thanks
I ask about using leftover funds because sometime down the track I might decide to stop working so I won't have employer contributions.
Cheers

Ziggy

At this point lenders rely on "income" not assets, however when SMSF lending becomes more accepted/mainstrean the ability to liquidate assets may become acceptable to service an SMSF's commitments.

If an SMSF is newly established then the lenders perhaps may not agree, but if it's an established fund with a good track record then perhaps in time they will.

 

[soyabean]

Hi MikeF,
The SMSF's trustee is my self +my partner, says A&B
here is a large LOC under A&B using equity of A&B's principle residence. We intend to use this LOC to purchase an IP in the SMSF. The bank is the lender but does not care what we do with the money, no mortgage on the IP so do I need to involve the bank at all in this transaction/purchase ? And if not can the trustee of the bear trust also be A&B rather than a corporate trustee ?
We will heavily salary sacrifice into the SMSF to cover the shortfall and also to pay off part of the the debt to at least a neutral geared position before we retire.
Any hole ?

Thank you.

 

[MikeF]

Hi Soyabean

Firstly, my understanding is that if you use your LOC to obtain funds to make a contribution to a SMSF then the interest is not deductible to you.

In answer to your question whether the LOC lender has to be involved in the transaction, the answer is no.

On the Bare Trust trustee it must be an incorporated entity. Apparently the lenders have legal issues with individuals being trustee. So if you set up a Bare Trust with an individual trustee (sole or joint) then it's a deal breaker from the lenders and their lawyers point of view.

 

[soyabean]

Thank you MikeF.
1. So it would be tax deductable if I borrow money from someone else's LOC ?
2. you mentioned corporate trustee for the bare tursy because that is the bank lender's requiremen. My question is: if the transaction has no bank lender (the lender is a relative with a huge LOC) involvement then is there any reason I have to have a corporate trustee for the bare trust ?
(I have received the pm thanks very much).

 

[MikeF]

Soyabean

1/ Doesn't matter who you borrow from it's not deductible if its a super contribution.
2/ In that case I guess not however there may be other issues to consider such as what happens if a "Bare Trust" trustee dies>

 

[373au]

NAB best I could find so far.

I was doing a ring around for loans to purchase property into a SMSF, St georges & Westpac were 10.4% & 10.8%. 75% LVR
N.A.B was a clear winner with 9% & 65%LVR, are ther any others that have bettered NAB's?

Spud

 

[babushka]

becoming your own bank!

Hi MikeF,
The SMSF's trustee is my self +my partner, says A&B
here is a large LOC under A&B using equity of A&B's principle residence. We intend to use this LOC to purchase an IP in the SMSF. The bank is the lender but does not care what we do with the money, no mortgage on the IP so do I need to involve the bank at all in this transaction/purchase ? And if not can the trustee of the bear trust also be A&B rather than a corporate trustee ?
We will heavily salary sacrifice into the SMSF to cover the shortfall and also to pay off part of the the debt to at least a neutral geared position before we retire.
Any hole ?

Thank you.

This is an interesting proposition. I have just read in the Australian Institute of Company Directors magazine for June 2008 and it discussed this very thing. Here are some extracts from the article:

• There is another alternative - become your own banker.
• "An alternative is where the client has an existing lending facility in place," (Commonwealth privant Bank's Mark) Causer explains "if they use the funds available to them, they can become banker in their own right."
• (Mark Causer) believes that the strategy of a fund member lending personal money to his / her own smsf has not been explored by many advisers or funds.
• The individual draws down from their existing facility, and lends the money through to the security trust.
• There has to be documentation in place such as a loan agreement, a custodian agreement for the security trust, etc
• There are compliance details - such as ensuring neither the fund nor the lender gain advantage from the arrangement, and all trustee decisions clearly minuted etc

An interesting suggestion - using an LoC to lend to smsf, certainly lower interest rates than smsf borrowing.

Any comments?

PS - for Soyabean: According to the article, Yes, the super fund trustees can also be trustees of the security trust.

 

[MikeF]

SMSF Lenders

I was doing a ring around for loans to purchase property into a SMSF, St georges & Westpac were 10.4% & 10.8%. 75% LVR
N.A.B was a clear winner with 9% & 65%LVR, are ther any others that have bettered NAB's?

Spud

Hi Spud

There are now more than 8 lenders in the SMSF space (including the original instalment warrant providers) that I'm aware of with 3 more apparently looking to do something shortly.

Whilst the rates quoted look attractive I think you need to look more closely because there are many differences in lender credit policies that at the end of the day will either work for you or won't.

If the rates your talking about are for residential properties then NAB at 9.46% is very competitive however their credit asesssment & loan approval criteria does not take into account further increased member salary sacrificed contributions unless they can be historically proven.

What this means is that unless the SMSF can afford the loan repayments with a margin for interest increases etc from it's current investment income plus it's net rental from the property to be purchased plus the members 9% compulsory PAYG contributions, then they will not approve funding.


Also if the property is not presently tenanted they will look to significantly reduce the expected rental of the property to be purchased by up to 40% in their serviceabilty calculation.


What this means is that unless the SMSF can afford the loan repayments with a margin for interest increases etc, then they will not approve funding.

Their rate is good however would you qualify?

PS Their LVR's are 70% for residential and 65% for commercial.

 

[MikeF]

This is an interesting proposition. I have just read in the Australian Institute of Company Directors magazine for June 2008 and it discussed this very thing. Here are some extracts from the article:

• There is another alternative - become your own banker.
• "An alternative is where the client has an existing lending facility in place," (Commonwealth privant Bank's Mark) Causer explains "if they use the funds available to them, they can become banker in their own right."
• (Mark Causer) believes that the strategy of a fund member lending personal money to his / her own smsf has not been explored by many advisers or funds.
• The individual draws down from their existing facility, and lends the money through to the security trust.
• There has to be documentation in place such as a loan agreement, a custodian agreement for the security trust, etc
• There are compliance details - such as ensuring neither the fund nor the lender gain advantage from the arrangement, and all trustee decisions clearly minuted etc

An interesting suggestion - using an LoC to lend to smsf, certainly lower interest rates than smsf borrowing.

Any comments?

PS - for Soyabean: According to the article, Yes, the super fund trustees can also be trustees of the security trust.

Hi babushka

Becoming your own banker is possible and there are financial advisors already setting up arrangements to do this. However, there are a number of issues you would need to be very much aware of such as the ATO has made numerous comments this year about such arrangements.

The ATO has issued a number of alerts (in particular TA2008/5) giving their concerns to arrangements which have features including the following whereby:

(a) The interest rate for the borrowing is zero or less than a commercial rate particularly where the lender is a related party;
(b) The interest rate for the borrowing exceeds a commercial rate particularly where the lender is a related party;

As a consequence of this any arrangement which exhibits any one or more of the features noted in their "warnings" may give rise to taxation and regulatory issues.

A copy of TA 2008/05 can be found at http://law.ato.gov.au/atolaw/view.htm?Docid=TPA/TA20085/NAT/ATO/00001