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

Hi Guys,

I have just joined the forum and yes I will be attending the meeting with Mike. It would also be great for peoplel to post questions about the instalment warrent situation for SMSF's before the meeting. That way we will have a good idea of what people want us to cover in our alloted 30 minutes.

And just by a way of background. I am a cpa who specialises in SMSF's. I work exclusively for other accounting firms (i.e. I don't have my own clients). I have been working in this sector since 1988. I am also a fellow of the Financial Services Institute of Australia, a Chartered Secretary, was a CFP until I gave up retail advising. I also still hold a partnership in an accounting firm (www.redmanpartners.com.au) although I don't actually work in the practice any more.
 
Would be interested to get your views on some of the products currently in the market which require personal guarantees from the directors of the trustee company who are also members and whether this breaches the SIS Act in light of concerns by the ATO following the recent taxpayer alert TA 2008/5 Certain borrowings by self managed superannuation funds and in particular ATO concerns regarding products where "A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF"

Given that there are products on the market where personal guarantees are not required what are the disadvantages if a loan is taken out with a personal guarantee and the loan causes the member to be in breach of the SIS Act.
 
The issue of personal guarantees being provided to an SMSF has been an even hotter topic since the recent taxpayer alert issued by the ATO to a point where some lenders are presently having a major re-think before releasing their loan offerings to the public.

As I'm currently working directly with a number of the new lenders in the SMSF space I'm told that their lawyers are saying that so long as an individual member's guarantee does not extend to the SMSF assets in any shape or form they are comfortable.

A lenders take on this before the ATO’s taxpayer alert was that their loan offer documentation would clearly set out the terms of any required guarantee.

Whilst there are lenders out there now requiring personal guarantees I believe that they perhaps run the risk of having these guarantees either unwound should the legislation be amended or perhaps grandfathered.

Should this happen at any time in the future then it will be interesting to see whether any lender affected will then require their loan arrangement to be reduced or even repaid should their secured position be somewhat voided .

I’m currently talking with one major lender with a view to providing our clients with an SMSF loan without the need for a personal guarantee. Loan valuation ratios (LVR’s) will however be somewhat scaled back to 72% for residential security and 67% for commercial property.

The above issues need to be clearly understood by SMSF trustees and independent professional advice obtained.
 
This is a very good poin that you raise and when the ATO released their TA it seemed a strange one because on the face of it when you give a personal guarantee you only expose yoru own assets, not any more of the actual borrower.

However, when you give a personal guarantee you potentially indemnify yourself out of the assets of the entity you are guaranteeing (at common law). So for example, if I gave a personal guarantee to a loan you were taking out and you subsequently defaulted I would be able to sue you for any money I had to contribute towards any claim made on me by your lender.

The same could happen if you gave a personal guarantee over your SMSF. Your SMSF doesn’t pay back the loan and the lender then hits you up for a guarantee payment. At common law you could potentially then sue the SMSF for the money that you have lost. The SMSF then has to sell other assets to pay you back effectively giving the lender access to more assets of the fund.

So what does this mean – well, a personal guarantee needs to be drafted in a way that does not give the individual any recourse whatsoever over the SMSF.

Another option, that I have already seen used, if for the individual to borrow in their own names and then on lend the money to the SMSF.
 
Peter,

That strategy works well when an individual has sufficient equity in other assets to borrow against those assets or cash available to on-lend to the SMSF at a commercial rate. If however you need to use the property as security for borrowing, which is usually the case, then borrowing against your main residence and on-lending to an SMSF isn't really going to be beneficial unless you have $300K equity in your main residence.

I agree with you Mike so many people ran into the woods without checking for bears. We had a senior tax barristers opinion in November of last year that said personal guarantees breached two sections of the SIS Act. We have waited patiently for products without personal guarantees and one mainstream bank is now offering 80% LVR on resi with 20 year loan term, 1.5% application fee and 1.5 basis points over the standard rate. Fairly reasonable product. No personal guarantees.
 
hi all
I am very interested in these warrants and as much info as possible would be great.
its a new area that I know very little about.
the lvr are not two bad at 65%.
can you mezz lend
so use a first tier for the major and then have a second teir all within the warrant field
technically you could lend upto 100% as long as you have two lenders
and if both did not require personal quarantees thats a very secure position
is this possible
reading It I think it is.
if the mezz or second tier is a private fund and arms lenght then you can secure a property.
also what is the position if you have two properties and one is crossed because of a equity lend to the other under comm ruling thats ok is it the same with this warrant.
I understand smsf but this is an area that I would like alot of information on and look forward to comming to the night.
Haven't been for a while been a bit busy
 
Grossreal

Forget about 2nd mortages/mezz. Forget about cross linking securities.

Forget about everything that happens in home loan land.

There are very strict rules/conditions/documentation under which an SMSF can borrow not to mention is it the right strategy.

Looking forward to seeing you there on the 5th.
 
hi ziggy2214
there is a bit of parking but need to be early.
all the parramata to city buses ie down parramatta rd stop at the footbridge or get off at office works and walk up.
I have a 5.00 meeting in bent street and will be calching the bus out of the city and the best way there is catch the ashfield lewisham bus and get off at broadway stop nearest to office works the driver will know.
and walk up.
there is alot of parking on the road that runs parrallel to parramatta road if you look on a ubd not sure of the name.I have never found it areal problem to find parking just a fair bit of looking
 
peterjohnson64 said:
Hi Guys,

I have just joined the forum and yes I will be attending the meeting with Mike. It would also be great for peoplel to post questions about the instalment warrent situation for SMSF's before the meeting. That way we will have a good idea of what people want us to cover in our alloted 30 minutes.

And just by a way of background. I am a cpa who specialises in SMSF's. I work exclusively for other accounting firms (i.e. I don't have my own clients). I have been working in this sector since 1988. I am also a fellow of the Financial Services Institute of Australia, a Chartered Secretary, was a CFP until I gave up retail advising. I also still hold a partnership in an accounting firm (www.redmanpartners.com.au) although I don't actually work in the practice any more.
Click to expand...

Hi Peter

Lets say I've used my super as a deposit and also borrowed 80% and purchased a property.
I would be interested to know if my employer contributions can be used to cover the shortfall between the rental income and the interest replayments.

Thanks
 
ziggy2214 said:
Hi Peter

Lets say I've used my super as a deposit and also borrowed 80% and purchased a property.
I would be interested to know if my employer contributions can be used to cover the shortfall between the rental income and the interest replayments.

Thanks
Click to expand...

Yes you can, but you also will have to sallary sacrifice into your super so that there is money available to pay the monthly interest.
Unless ofcourse you haven't spent all of the super money and there is still some in there....

Cheers
 
Thanks to Sim for posting the audios, to David / Perky for organising the meeting, and to Michael F (the speaker).

Although we won't be rushing to buy a property for our smsf just yet (our accountant thought we should!), the meeting was very useful to guide us in our thinking and decision.
 
Many thanks to all those that attended the Monday night SIG meeting on SMSF borrowing. And a special thanks to Perky for arranging the venue etc.

I have one correction to make. The lender comparisons included some loan information on the Calliva product which I have since found to be dated & therefor some what incorrect.

Many thanks to Gus Wilkeson from Calliva for pointing this out.

Essentially Calliva changed their offering from a full instalment warrant to a more simpler SMSF loan structure. Their current product costs are now 1.5% establishment plus $2,750 for the trust establishment with NO ongoing costs other than having the property professionally managed. The borrower pays all normal costs such a stamp duty valuations costs etc.

Gone is the 4% per annum management fee.

Current Calliva interest rates are : Variable 10.8% pa 1 Yr fixed 10.95%, 3 Yr fixed 10.75% & 5 Yr fixed 10.75%.

Max LVR is 70% subject to existing tennant lease terms.

Also, early termination/break costs may apply during a fixed rate period if any economic loss is incurred by the lender during a fixed rate period.
 
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