Refinancing equity to lend to SMSF for commercial

Discussion in 'Loans & Mortgage Brokers' started by CapGrowth, 7th Jul, 2021.

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  1. CapGrowth

    CapGrowth Member

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    Hi, Newbie question from long time reader.

    I am looking to buy a commercial property in existing SMSF. Price around $450k with existing lease and net 5% yield. SMSF can come up with 45% deposit and is diversified in other shares, ETFs, etc.

    Instead of going through commercial loan for under $250k I wonder if my family trust (existing) can borrow against equity in existing residential IP and lend to SMSF at arms length LRBA. The residential IP is unencumbered and is owned in personal names. My accountant seems OK with this.

    1. Would P&I loan with 100% offset secured by the resi IP be the correct way to do this?
    2. What interest rates are available?
    3. How long would it take from application to approval and settlement?

    Thanks in advance
     
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  2. Terry_w

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

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    in short no
     
  3. Terry_w

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

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    Actually it might be possible for the SMSF to borrow from a related entity if a lot of conditions are met, max 70% LVR, 15 year term, registered mortgage. etc

    But there are practical difficulties in a trust finding a lender willing to allow it to borrow and onlend the money and many legal issues to consider - as well as lending issues.
     
  4. CapGrowth

    CapGrowth Member

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    Thanks Terry.

    Could we borrow and lend to the trust to buy commercial IP in the trust? If we had formal loan agreements between us and the trust? i.e. leave SMSF out?
     
  5. Terry_w

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

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    potentially you could
     
  6. CapGrowth

    CapGrowth Member

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    Thanks Terry
     
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  7. Paul@PAS

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

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    Yes. But before writing off the smsf matters due to lack of advice I would take a breath and think it through. The ultimate goal is low / no tax on growth. ie 0% or 10% in smsf. And 15% tax on net rent. Thats where the smsf idea works best.

    There may be merits to consider a ungeared unit trust with two (or more) unitholders. Eg SMSF is positive geared as untholder and Disc Trust (or humans or even both) is also a neg geared unitholder. Over time the unitholdings could be migrated towards the SMSF until its 100% unitholder. No duty. Minor CGT which can be timed and managed. In return the debt part is neg geared and could be a tax benefit. Unlike a smsf which pays 15% on its share of rent.

    Then the trust could lend to the SMSF but there are numerous conditions (and a trap or two) to related party loans. The ATO have a comprehensive policy on smsf related party loans that makees them unattractive.

    The there is a limited recourse loan but this requires the SMSF alone is owner (through a custodian trust). The low LVR will assist approval. Costly but when its related its even more costly desite the cheap source of equity funding. It can add a tax issue to the lender (ie your personal tax)

    Your accountant should have mentioned these strategies or it may be a sign they are not strong on SMSF matters. Perhaps even trust issues
     
  8. FXD

    FXD Well-Known Member

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    Hi Paul, apart from the non gearing UT (NGUT) itself as a whole not borrowing, what about other
    non-SMSF unit holders who invest into the same NGUT (with SMSF), do their funds also need to
    be non-gearing individually & separately "by regulation"???

    I can see potential problem if one of the unit holders got into financial trouble and need to sell
    out (but its funds may be equity from say PPOR which lender now forecloses on) of the NGUT
    and there is no sufficient funds in NGUT, SMSF and all other unit holders to buy out the exiting
    one.
     
  9. Terry_w

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

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    There is nothing to prevent them from borrowing, as long as the trust assets are not mortgaged, or charged.

    This is a problem for all unit trusts.
     
  10. Paul@PAS

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

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    I
    A problem for all buyers of any property when others are involved. Issues include lost jobs, death, divorce, illness etc. Joint & several liability ? Less common for spouses but it could still be a concern. If Party A cant buy out B or bring in a friendly C then it could pose concerns.

    There is also a related issue. Lets assume the unitholder borrows against their own home under a loan split. Then they seek to sell that home and move elsewhere. It may make it like one of those slidy puzzles and you cant slide the pieces around. eg lender wants whole loan discharged or there is no suitable security to switch security since the trustee cant use ungeared property etc... One option (even temporary) that might work is increasing the SMSF unitholding temporarily until a replacement home is available to use for reimplementation of the strategy. Depends on many factors incl duty and cgt issues.

    All reasons why many strategies are complex and need comprehensive advice.
     
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  11. CapGrowth

    CapGrowth Member

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    Thanks Paul,
    I need to do some homework...
    Over time the unitholdings could be migrated towards the SMSF until its 100% unitholder. No duty:
    1. Does transferring units to SMSF require the units to be debt free?
    2. No stamp duty on transfer to SMSF - does this depend on the state where the property is located?
     
  12. Terry_w

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

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    1 yes
    2. Yes and the value of the property.
     
  13. melbourne171

    melbourne171 Well-Known Member

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    not sure max 5% of the value of the SMSF fund’s assets allowing to invest in a unit trust is applied?
     
  14. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    we have done a few of these sorts of things with the legals and structures taken care of by the clients people, so have no clue about that end of it.

    Just need to be careful as to what lender one goes to for the cash out from the lending side

    ta
    rolf
     

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