SMSF Loans - Personal Guarantees

Whilst St George were the only bank previously not requiring personal guarantees from SMSF members on all of their SMSF loan product offerings, their Business & Corporate Banking unit have this week amended their minimum security credit policy as follows.

"Beneficiaries guarantee from all adult beneficiaries where servicing assessment includes reliance on member contributions to meet bank
policy."

What this means is that unless the SMSF income not including members contributions meets the banks servicing criteria then a personal guarantee will be required.

Interestingly St George's consumer SMSF product seems to have not changed.

Lets hope this continues to be the case.
 
Hi Mike

Under what circumstances does one get a Business & Corporate loan in a super fund versus a Consumer SMSF loan? Is the Business & Corporate one for small APRA funds?

Okay, I'm an idiot, small APRA funds can't borrow. Now I'm really confused.
 
Hi Mike

Under what circumstances does one get a Business & Corporate loan in a super fund versus a Consumer SMSF loan? Is the Business & Corporate one for small APRA funds?

Okay, I'm an idiot, small APRA funds can't borrow. Now I'm really confused.

It's just a different section of the bank. One product is offerred via retail and one via business. They both deal with SMSF.
 
It's just a different section of the bank. One product is offerred via retail and one via business. They both deal with SMSF.

Curious. So if you wanted to be sure of getting a consumer one and not a business one, how would you do it? We did our SMSF loan (before this came in) via a branch, but they were just a postbox and it still really went through CMS for all practical purposes. I honestly could not tell you whether ours was a "consumer" or a "business" one (and of course the distinction didn't matter at that point).
 
Curious. So if you wanted to be sure of getting a consumer one and not a business one, how would you do it? We did our SMSF loan (before this came in) via a branch, but they were just a postbox and it still really went through CMS for all practical purposes. I honestly could not tell you whether ours was a "consumer" or a "business" one (and of course the distinction didn't matter at that point).

Hi Deejay

In answer to your original question...what Stuart said is correct.

Your loan will be a retail consumer loan.
 
What's the general view on agent007's comment, particularly if the banks now seem to require this? What are the implications of a personal guarantee?

Cheers,
GreenGoblin

In generals terms the issues surrounding the giving of personal guarantees in support of an SMSF borrowing are seen by many as:

o the guarantor may have an implied right of recourse against the SMSF and its other assets and this would be in breach of the SIS legislation
o any payment made under a personal guarantee will/may be seen by the ATO as being a contribution and therefore may breach member contribution caps
o the giving of a guarantee could be seen to provide the SMSF with receiving special income and/or benefit because of a scheme or arrangement between non arm’s length parties.”Special income” is covered under ITAA 295-550.
 
In generals terms the issues surrounding the giving of personal guarantees in support of an SMSF borrowing are seen by many as:

o the guarantor may have an implied right of recourse against the SMSF and its other assets and this would be in breach of the SIS legislation
o any payment made under a personal guarantee will/may be seen by the ATO as being a contribution and therefore may breach member contribution caps
o the giving of a guarantee could be seen to provide the SMSF with receiving special income and/or benefit because of a scheme or arrangement between non arm’s length parties.”Special income” is covered under ITAA 295-550.

Sorry, I'm confused (nothing new :confused:)
1. The super fund is mine (SMSF).
2. I am a guarantor on the mortgage that my SMSF is taking out.

If I, personally, make above 9% contributions to the SMSF, then that is NOT at arms length and is seen as a contribution by me!! Ummmm, yes, but I do not understand then how you could buy property with a SMSF and not do the above. After all it is your Super Fund. Aren't you allowed to put in up to $50k a year extra or about that (not that I would with Mr. Rudd likely to change the rules at any time). And if u contribute that, then can't the SMSF then direct that money towards the investment?
Cheers,
JB
 
In generals terms the issues surrounding the giving of personal guarantees in support of an SMSF borrowing are seen by many as:

o the guarantor may have an implied right of recourse against the SMSF and its other assets and this would be in breach of the SIS legislation
o any payment made under a personal guarantee will/may be seen by the ATO as being a contribution and therefore may breach member contribution caps
o the giving of a guarantee could be seen to provide the SMSF with receiving special income and/or benefit because of a scheme or arrangement between non arm’s length parties.”Special income” is covered under ITAA 295-550.

To all of the above I'll add that by giving a guarantee, your personal borrowing and serviceability capacity will decrease by the amount of the loan the custodian entity is holding on behalf of the SMSF.
 
Sorry, I'm confused (nothing new :confused:)
1. The super fund is mine (SMSF).
2. I am a guarantor on the mortgage that my SMSF is taking out.


If I may:

1. The SMSF is not yours. You're just the beneficiary of the SMSF and maybe the trustee too. But, it doesn't belong to you. It is its own entity.
2. The SMSF can't take on a mortgage. The custodian entity or bare trust takes on the mortgage and offers the asset in guarantee to the Bank for the funds that were provided.
 
Hi Mike

Firstly, I like reading your input - good stuff!

I write SMSF loans full time and arrange the required legal structures.

Personally, I feel comfortable with lenders who require personal guarantee/s.

When Taxation Alert 2008/5 (TA 2008/5) was broadcast, it most certainly sent the banks legal eagles back to the drawing board .... of concern, the potential issues raised with personal guarantees.

It is important to remember that the ATO’s main concern is that the SMSF’s assets other than the property acquired under this borrowing arrangement, are protected from any claim that may arise.

Technically speaking, the person offering the guarantee has a right of claim against the SMSF should the unforseen happens ..... property is sold and a loss realised.

This places the SMSF assets at risk, notwithstanding the limited recourse rules associated with this form of borrowing.

The banks solution was to amend the financing deed that the guarantors sign:-

‘ …. the guarantor acknowledges that they have NO right of indemnity against the borrower (SMSF) if they are called on under their guarantee and that right of indemnity might result in a claim being made against other assets of the superannuation fund’

Therefore no claim can be made by the guarantor to the SMSF and the assets are protected ..... just what the doctor (ATO) ordered.

What are your thoughts around this way of thinking?

Cheers.

Vic
 
The banks solution was to amend the financing deed that the guarantors sign:-

‘ …. the guarantor acknowledges that they have NO right of indemnity against the borrower (SMSF) if they are called on under their guarantee and that right of indemnity might result in a claim being made against other assets of the superannuation fund’

Therefore no claim can be made by the guarantor to the SMSF and the assets are protected ..... just what the doctor (ATO) ordered.

I don't follow, so why the guarantee in the first place?
 
If I may:

1. The SMSF is not yours. You're just the beneficiary of the SMSF and maybe the trustee too. But, it doesn't belong to you. It is its own entity.
2. The SMSF can't take on a mortgage. The custodian entity or bare trust takes on the mortgage and offers the asset in guarantee to the Bank for the funds that were provided.

Thx for the corrections.....:)
JB
 
I don't follow, so why the guarantee in the first place?
My reading is that the guarantee protects the lender against the SMSF defaulting on the loan.

The clause smsflending.com referred to, " …. the guarantor acknowledges that they have NO right of indemnity against the borrower (SMSF) if they are called on under their guarantee and that right of indemnity might result in a claim being made against other assets of the superannuation fund", protects the SMSF from the guarantor.

ie If the guarantor has to put in money to keep the SMSF afloat, or cover a shortfall on the property sale, then the above clause ensures that the guarantor can not go on to make a claim against other assets of the SMSF (ie shares, cash) to compensate them for any money they've had to contribute due to the guarantee. This is to satisfy ATO requirements.

So if the SMSF's property is sold and there's a $100K shortfall which the guarantor has to meet, the guarantor can't then ask the SMSF to repay that $100K from other assets in the SMSF.
 
Hi Mike

Firstly, I like reading your input - good stuff!

I write SMSF loans full time and arrange the required legal structures.

Personally, I feel comfortable with lenders who require personal guarantee/s.

When Taxation Alert 2008/5 (TA 2008/5) was broadcast, it most certainly sent the banks legal eagles back to the drawing board .... of concern, the potential issues raised with personal guarantees.

It is important to remember that the ATO’s main concern is that the SMSF’s assets other than the property acquired under this borrowing arrangement, are protected from any claim that may arise.

Technically speaking, the person offering the guarantee has a right of claim against the SMSF should the unforseen happens ..... property is sold and a loss realised.

This places the SMSF assets at risk, notwithstanding the limited recourse rules associated with this form of borrowing.

The banks solution was to amend the financing deed that the guarantors sign:-

‘ …. the guarantor acknowledges that they have NO right of indemnity against the borrower (SMSF) if they are called on under their guarantee and that right of indemnity might result in a claim being made against other assets of the superannuation fund’

Therefore no claim can be made by the guarantor to the SMSF and the assets are protected ..... just what the doctor (ATO) ordered.

What are your thoughts around this way of thinking?

Cheers.

Vic

Hi Vic

You still seem to have missed my last point .........

In my view one of the biggest issues regarding the giving of a guarantee by SMSF members is section 295-550 of the tax act in that the giving of a guarantee could be seen to provide the SMSF with receiving special income and/or benefit because of a scheme or arrangement between non arm’s length parties. The words ”Special income” are of particular importance and I think it best for all concerned that the tax man makes a clear ruling regarding this issue asap.

On guarantees generally I think at the end of the day the powers that be will most likely accept that a properly worded lender guarantee document that totally protects all other SMSF assets will be given the nod from a SIS Act point of view.

However until the tax man makes it abundantly clear regarding 295-255 ramifications its my view that guarantees should be avoided if at all possible.
 
For what its worth, I agree with Mike.

Whilst we have at least one lender not requiring personal guarantees (PG), why take the risk? My advice at this point in time is to always use a lender that doesn't require PG.
 
st George bank contact details

Hi everyone,

Which st George bank branch in Melbourne, which already handle lending smsf for residential property investement?

Can I please have their contact details ?

Thanks,
rpham
 
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