Burrowing against unit trust certificate

Discussion in 'Loans & Mortgage Brokers' started by Yvonne, 19th Jun, 2021.

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  1. Yvonne

    Yvonne Member

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    Hello, I came across this forum and hope someone can shed some light on our situation.

    We have purchased a residential propery to be converted into a medical centre. We need to secure significant funds for this project. The property is currently held in SMSF (nil loan). Our accountant proposed to set up an ungeared unit trust with SMSF to hold approximately 50% of the interest in the underlying property and my husband and myself the other 50%. Are there banks that are willing to see the unit certificates as a useful security for a commercial loan? Our alternative is to organise unsecured burrowing and top this up with a loan using our private home as security. Thank you for any insight you can offer. Cheers, Yvonne
     
  2. Trainee

    Trainee Well-Known Member

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    By medical centre do you mean a vet practice specialising in rabbits?

    Are SMSFs allowed to hold assets in partnership with members?
     
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  3. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    If its DA'd for commercial use and an unencumbered property. I dont see why banks wont lend against it.

    However structure wise, will need more digging
     
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  4. Yvonne

    Yvonne Member

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    Hi Tony, we are awaiting the outcome of our DA application for commercial use, that is all looking good so far. Are there any specific issues in terms of the structure that you forsee?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No.

    You should also seek legal advice before you do this as there are several issues
     
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  6. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    I dont really touch commercial loans to be upfront, I only focus one residential.

    I think commercial brokers on here are better to answer you
     
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  7. Yvonne

    Yvonne Member

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    Thanks Terry for your response. That doesn’t sound promising. Our accountants had come up with this structure as it should be relatively easy to burrow funds. I will get legal advice as you advised.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Sis reg 13.22C and D may be relevant too.

    In theory a unit holder could 'mortgage' their units and borrow, but there would be no lender willing to lend for this I think
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A SMSF could own an asset as tenants in common with a member or own units in a unit trust with a member etc
     
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  10. Yvonne

    Yvonne Member

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    Thanks Terry, the regulation mentioned above is the undoing of our plan I think. It states: “the unit trust must not allow a charge to be made over any of its assets. For example, the unit trust cannot use any real property it holds as security or grant a mortgage over any property at any time.” If I understand this correctly that means that the units in the unit trust can not be used as security. It’s better to find this out now than coming to this roadblock once the unit trust has already been established. Thank you very much for your help and insight, it certainly prevents a lot of heartache down the track. Cheers, Yvonne
     
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  11. Trainee

    Trainee Well-Known Member

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    Why was this not considered before buying the property under the smsf?
     
  12. Yvonne

    Yvonne Member

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    We purchased the building under a LRBA loan. Renovations were supposed to be funded under a LRBA loan too. Unfortunately we had an adverse ATO ruling: our project will change the nature of the asset which is not permitted while there is a LRBA in place. We have since paid the loan off but can’t access a loan via SMSF due to the ATO ruling. We therefore have to look at other options.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Do you want to tap into the equity?
    The SMSF trustee could sell it and buy another.
    If you want to retain it they could sell it to a related entity
    costly though
     
  14. Yvonne

    Yvonne Member

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    We have put a lot of money into this project in terms of architect fees, DA approval etc. Also, it is the perfect building and location for a future medical centre. Can you explain what you mean by selling it to a related entity, what would we achieve by doing that?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You have put money in or the smsf has?

    If the smsf sold it to a company, for example, the company could borrow to buy it and the smsf would be flush with cash.
     
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  16. Yvonne

    Yvonne Member

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    We

    We personaly have put money in. I will try to secure some funds personally to fund this project (and check if this is in accordance with the relevant laws). If that doesn’t work I will look into your suggestion re selling it to another entity. Thank yuu very much for your time, it’s much appreciated!
     
  17. Scott No Mates

    Scott No Mates Well-Known Member

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    Is it possible to setup a 2nd SMSF, transfer some cash etc, borrow to purchase, pay off 1st SMSF & then use cash in first SMSF - will it be doable even when paying SD & CGT & ensuring compliance?
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What do you mean you have personally put funds in. You don't own it.
     
  19. Yvonne

    Yvonne Member

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    We own the property 100% in SMSF. We personally have paid for architect, toen planning, DA application costs.
     
  20. SatayKing

    SatayKing Well-Known Member

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    Wonder if that could have an effect of being considered a contribution to the SMSF and could exceed the contribution caps - SMSF has benefited from money paid from personal bank accounts.
     
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