SMSF borrowing

The issue for a SMSF borrowing is not just about how MUCH it can borrow but what is a sensible level of borrowing. A higher LVR may be capable of approval but will create cashburn so the contributions are consumed. The fund will be burning contributions to merely sustain the property. A moderate level of borrowing where cashflows (incl consderation for depreciation deductions) are neutral is ideal in many cases. This allows reinvestment of new money so the SMSF grows. A offset linked to the loan can also be effective although the larger players who offered these facilities have largely withdrawn (AMP / STG). But a offset in its self wont attract growth.

Care should also be taken that the ATO has written to funds witha predominant (or singel) asset and the ATO has a concern about that arrangement and are expecting greater auditor scruitinty of the fund investmnet strategy to address this and the potential absence of life insurance (which isnt mandatory)

"Negative gearing" where a smsf consumes contributions or earnings due to high debt is highly ineffective since the tax rate is 15%. The conventioanl thinking around neg gearing as such fails for super in many cases. Too often we see personal investors see super as another way to get property and the

A broker will also guide the liquidity requirements and that should always be considered a floor and nota gudie to a acceptable minimum. If the SMSF property loses a tenant or the member/s suffer a financial issue affecting contributiosn there may not be sound strategies for sustaining the cashflows and a (forced) sale could be contemplated.

 

Couldn't agree more!

 

Sorry to go off track here but something I was thinking about earlier was can two seperate SMSF purchase a property together via finance or cash?

 

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YES

 

Yes. But with substantial issues. Likely a concern but it depends.

There could be other options eg ungeared unit trust. Related party loan and other ways

 

Came across this link:

Using Your Self-Managed Super Fund for Investment Without SMSF Borrowing

Does this legally get around the in-house asset rule?

 

Look at the qualifications of the author

 

I was looking at the lack of qualifications

 

Terry do you by any chance happen have written an optimal structuring tip article involving smsf +
other capital suitable for gearing/borrowing to enable buying larger property? Thanks

 

There is never a "optimal" smsf or strategy and care has to be taken if such a written guide existed (some do and are dangerous) that it is general financial advice. The wrong person reads it and doesnt know all the issues and its trouble. Personal advice concerning the smsf matters and available choices tends to then lead to finance alternatives after the property. Never start with the finance choice first. And a word of warning. I have trained and conducted seminars for professional members of accounting bodies as well as financial planners and soliictors and even many who think they know stuff.

There are cases where negative gearing for some parties and positive gearing for others works well. To achieve this extrnal property security may be needed (eg owned by member/s). Related party loans and more.
Property type also affects this as related party leases, commercial and resi are all very different.
A matter like members ages etc can vastly impact property decisions. The first problem is age. Pensions may be 4% or more and with a smsf loan there may be insufficient cashflows.

The second catch to some smsf property deals is death. It is easy to overlook the rule that "death benefits must be cashed" and people tend to die at very inconvenient times.
The problem with the death benefits cashing rule (SIS Reg 6.21(1)) is a property sale can be imposed in many cases if a member dies. There may be limited strategies to being in new memebrs to replace that deceased member. Ths means benefits must leave the fund and in some cases - as cash. and to further complicate this SIS Reg 6.21 limits the cashing to one, or two payments. Not three etc.

 

No, I haven't written much about structuring SMSFs as it is a dangerous area that can cross into financial advice. Pure structure is legal advice, suggesting a fund borrow would be financial advice.

 

SMSFs are a trust and articles on trust strategies are all very complex and its very easy for someone to read up and think they are an expert and get it thoroughly wrong. And have ASIC breathing down your back. Some ways a smsf can have a property interest and some of these have variations

• Direct ownership 100% title
• A % ownership as TIC (without a mortgage or giving security and many catches)
• Fixed unit trust alone or with others (no mortgage, no security over property)
• Indirect property trusts - listed and unlisted
• Private trust arangements (subject to asic limits)
• Public unit trusts
• Widely held unit trust which may borrow
• Pre-99 unit trust
• Fractional interests - listed
• Buying land and enterering into a JV (land cant be used as security for a loan)
• Company ownership (many issues)
• Limited recourse borrowing - bank
• Limited recourse borrowing - related party
• Limited recourse borrowing - Independent lender (rare)
• Lend only -secured (not related parties)
• Lend only - unsecured (not related parties)
• Long term lease
• Sale to smsf and lease back re a related party for business premises

 

Hi All

New to SMSF so doing some research.

Where can I get an LRBA document done? Is it provided by the accountant or a lawyer?

Thanks

 

only lawyers can prepare legal docs. But usually these are supplied by the lender.

 

A limited Recourse Borrowing arrangement is not "a document".