LRBA in Personal Names

Discussion in 'Superannuation, SMSF & Personal Insurance' started by JohnPropChat, 5th Apr, 2020.

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  1. JohnPropChat

    JohnPropChat Well-Known Member

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    Without using a LOC or cash to fund a related party LRBA, is there a lender out there that would lend based on personal servicing and guarantees for purchase/refinance of an SMSF property?

    I remember that there were some lenders that did this to SMSFs with individual trustees (not company).

    Just exploring options since the SMSF lending space has become niche and rates not competitive.
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    It cant be a smsf loan is if a LRBA as you describe. You are talking about externally sourcing borrowings using other security and then onlending this to the fund as a related party LRBA ? No SMSF lender will lend on a guarantee alone. They want title and a guarantee due to the limited recourse. Why not an ungeared unit trust ? Many lenders can do that. But you start mentioning smsfs and they may want to avoid it.

    No smsf lender will lend based on personal servicing. The fund must service its own loans and if it cannot then why are you even considering it ?

    Human trustees. You may be unable to even consider a related party loan.
     
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  3. JohnPropChat

    JohnPropChat Well-Known Member

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    I am trying to remember the specifics but it went something like this:

    Lender X would offer low rate mortgages for SMSFs and they only did that if the SMSF has human trustees.

    So property purchased in human trustees names (based on personal servicing and guarantees) and a "declaration of trust", if that is the right term, is setup so that there is distinction between assets held for SMSF and assets owned personally.

    They probably assessed SMSF's servicing as well. Not sure if that mob still exists but just interested to know if there are options for low rate SMSF mortgages that doesn't involve using other assets for LOC and/or cash to onlend.

    Is there lending involved in a NGUT?
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    These are usually dodgy brokers and spruikers (often with suitable property funny enough) who pack what appears a LRBA but is really a related party loan to the members (lower rate looks nice) using other equity. Its a highly questionable practice to bait and switch and deceive without financial advice. IMO no broker can even pedddle this without raising major licensing and conflict concerns.

    If a smsf cant do it it probably shouldnt do it. A crude declaration of trust isnt acceptable for a LRBA. Only the owner (SMSF?) can give that declaration. A bare trust is somewhat different and a legal concept for legal advice. And a bare trust trustee cant be the same party as the beneficial interest.So its breached on acquistion isnt it ? And on loan repayment there would be duty and CGT to consider too.

    A non geared UT can have one or more unitholders that has not borrowed (smsf or more than one) and others who do (members or others). This can give -ve gearing benefits to the higher marginal rate taxpayers with and +ve cashflow to a smsf. The trust property is not subject to a mortgage or recourse for that loan. Generally the members home or holiday home of other suitable equity is ised as security. SIS Reg 13.22 C & D but its NOT a DIY solution. At. All. It has traps.
     
    Last edited: 6th Apr, 2020
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  5. MWI

    MWI Well-Known Member

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    But even if what you describe would be possible to refinance to lower interest rates wouldn't you still need to abide by the safe harbour rules, meaning at present you need to pay 5.94% rates?

    5.94%
    The LRBA safe harbour interest rate for 2019/20 for real property is 5.94%, up somewhat from the 5.80% for 2018/19. The rate for listed shares or units is 7.94%.Jul 10, 2019
    LRBA safe harbour interest rates for 2019/20 up slightly
     
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  6. JohnPropChat

    JohnPropChat Well-Known Member

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    I thought the safe harbour rates are for related party LRBAs only. Plenty of SMSF lenders have rates much lower than 5.94%
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    You arent getting it. There is no lender.

    That link is for the minimum rate on a complying loan to be used for a complying related party loan. . Its not a credit product. Add in all the compliance costs on top and the effective rate is higher. A LOT higher. eg Monthly fees, legals, advice etc

    eg Comparison rate on a typical lender issued smsf loan at 4.99% = 5.79%.

    See rate v comparison rate here : Compare SMSF loans | Learn about SMSFs | RateCity
     
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  8. MWI

    MWI Well-Known Member

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    I agree, there was a window of opportunity and choice for SMSF few years back, but most since then have pooled out from lending to SMSF.
    I have commercial rates with St George currently at 6.16% and LRBAs with related party loan that I need to adhere to 5.94% (even though this was privately on-lent with 3.51% current interest rate - hence I generate additional income for spouse and myself under such circumstance).
    Have also offset accounts with St George where there's nearly enough cash to pay off those loans.
     
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  9. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks for all the responses. I can't seem to find that information from a few years ago but it's best to assume it was some kinda packaged related party LRBA from dodgy operators.
     
  10. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks Paul. I understand, I think there was some terminology confusion on my part.
     
  11. Terry_w

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

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    My company doesn't assist with SMSF loans because of the risk, but my understanding is that the lenders will rely on the income of the SMSF and the income of the members.

    If you are contemplating a SMSF loan being refinanced you should take the opportunity to change the trustee of the fund to a company - after legal advice.
     
  12. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks Terry. Our SMSF has a company trustee and I intend to keep it that away. Have an LRBA with LaTrobe, rates are competitive compared to other SMSF products but the rate differential (SMSF vs personal) widened so much in recent months, I thought there might be some creative strategies for the next purchase but from the looks of it not whole lot of options out there except for NGUT and not without its own set of issues.
     
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  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    There is sound option not mentioned. No further purchase. Investment concentration risk, leverage and market risks may need to be considered as part of the fund strategy
     
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  14. MWI

    MWI Well-Known Member

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    I suppose we are lucky as commercial LRBAs loans are nearly paid off and all that cash is sitting in the offset accounts whereas for personal LRBAs there's widened disparity in interest rates.
    I cannot deposit it back BUT what my family does is deposit that difference at the end of the year as personal contribution back to SMSF (BUT must make sure you don't go beyond CC limit of $25K and are still in accumulation plus have not reached max limit of $1.6M).
     
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  15. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    You could still do that without paying contributions. A debt forgiveness is as good as repayment and may be either a concessional or non-concessional contribution. TR 2010/1 para 36
    A cashflow strategy many ignore or incorrectly fear

    Dont foget catch up contributions in the 2020 year for members who TSB (total super balances) at 30 June 2018 were < $500,000
     
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  16. MWI

    MWI Well-Known Member

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    Thank you Paul never thought of debt forgiveness (although use that in our business trust beneficiaries) but still cannot utilise as each year we max out our concessional (actually even have used reserving contribution for both of us) plus no longer qualify for non-concessional, hence certainly no catch up contributions too for us.
    But appreciate your insight!:)