Loan Tip: SMSF Borrowing to Buy Shares

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 28th Mar, 2022.

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  1. Terry_w

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

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    The same laws apply to a SMSF borrowing to buy shares as they do to a SMSF borrowing to buy property.

    See my post at Loan Tip: SMSFs Borrowing to Invest



    The difference is that when shares are bought it is rare for a single share to be purchased. So section 67A of the SIS Act which only allows for borrowings to acquire a ‘single acquirable asset’ may be a problem.


    However, subsection (3) of section 67A allows for a collection of shares of the same class in a single company to be counted as a single acquirable asset where they have the same market value as each other and are purchased at the same time.


    Example

    Simpson SMSF Trustee Homer wants to buy 1000 CBA shares at $99 each and borrow to do so.

    This is possible but the shares have to be held on a separate trust to the SMSF. All the shares have to be purchased in the one transaction.

    Homer also wants the SMSF to buy 1000 ANZ shares as well. This is also possible as with the CBA shares, but these would have to be held under a separate trust.


    But I don’t think there are commercial lenders out there who would lend for this sort of thing. It may be possible to related party loans however.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The LRBF can be used for homogenous shares or trust units which themselves are diversified internally. ETFs are a great example.

    eg VAS ETF, Bank. However, most lenders wont easily consider it as its not property. Even the ATO SMSF annual return considers LRBFs can encompass many types of investments. See page 16 Label 15b. So, why dont lenders allow non-property ? A registered first mortgage cant be taken over shares or trust units. Land dealings allow a mortgagae to exist on title. Only a floating charge could exist over the custodian trustee legal assets. Its pretty lousy security. Its a flawed issue for the chess system that lenders cant take security IMO.

    A related party LRBF is also problematic for this reason. No caveat can even be noted. The PPSR Personal Property Securities Register is also of very limited use since NOBODY would perform a search of company legal title over shares as custodian. Its lousy security.
     
  3. Terry_w

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

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    NAB offer a product
    NAB Super Lever

    When borrowing to buy shares, such as with the NAB Equity Builder, the lender takes security by taking the title to the shares and holding it on trust - similar to hold system title mortgages. It seems they do something similar with SMSF lending.
     
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  4. Terry_w

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

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    wow, they will lend up to 60% on some ETFs such as VAS
     
  5. SatayKing

    SatayKing Well-Known Member

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    It's a margin loan.
     
  6. Terry_w

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

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    Yes - it seems pretty standard terms and rates to 'normal' margin loans.
     
  7. SatayKing

    SatayKing Well-Known Member

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    Not that I would do it but I wonder what arrangements the Trustees of the SMSF would need to have in place to cover the possibility of a margin call or a set of requirements where it is getting close to or in any margin buffer.

    At one stage some thought 50% gearing was safe especially with say CBA shares. Turned out with the GFC it wasn't.
     
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  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A margin call may just be a reduction in the loan to within acceptable limits. Could require increased cashflow to sustain a holding. Or sell down and cut the position.
    One benefit of margin facilities is the whole portfolio is also considered. So while your XXX may be down it may reflect a very trivial element. The limited recourse and guarantee nature is more likey to encourage positions being cut. That has a trap:

    For example, the acquired assets may need to be sold to correct a margin call. If the sale proceeds don’t completely repay the loan, the individual fund members will need to repay the residual loan balance. They will have to do this from sources other than the SMSF. That is a contribution. It could also trigger excess contribution cap issues.

    One downside is cost
    The lender/security trustee manages all the loan administration. They will set up individual LRBAs for each transaction and will purchase the assets on the SMSF’s behalf. Its $250 per loan.
     
  9. TwoDogs

    TwoDogs Well-Known Member

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    All too hard. Just use warrants to buy shares with leverage.
     
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