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Substituting security on SMSF bear trust loan ?

Discussion in 'Property Finance' started by See Change, 6th May, 2016.

  1. See Change

    See Change Timing Lord Premium Member

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    We're planning on selling one of our SMSF properties in the new financial year . This will give our SMSF a nice positive cash flow . The property is in Sydney so nice cap gain and the cash flow will more than outstrip any medium term capital gain . Also at some stage we will need to start converting our assets out of property to a degree so it makes sense on several levels .

    We are looking at buying a further property in our fund but the banks have tightened up their lending criteria since we were able to max out our borrowing capacity. Have to check with our broker whether we can borrow more .

    Other alternative is to substitute security on the loan on the current property we're selling . It sounds as though it would be a big no no , but I thought I'd put it out there for expert opinions .

    @Terry_w , @Paul@PFI

    Cliff
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The same Custodian trustee could buy a new property on trust for the SMSF trustee, but I don't think the SIS Act could be complied with because the loan is already in place so would the custodian trustee be borrowing to acquire an asset. You would need specialist advice on this - DBA Lawyers perhaps.
     
  3. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Not a chance unfortunately Cliff - contravention of the SIS Act rules.
     
  4. See Change

    See Change Timing Lord Premium Member

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    Thought that would be the case .

    So we can save a bit by using the same trust ...

    Thanks guys .

    Cliff
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    A new trust, but the trustee could be reused.
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The limited recourse borrowing rules only permit the lender to take security over the same asset as being acquired. (s67A / B of Superannuation Industry (Supervision Act 1993). This means the security cannot be switched for another fund asset or using any other security given by a member (ie own home)

    There may be another way if you have property outside super that can be used as the sole loan security INSTEAD OF the new proposed acquisition. Thats the old ungeared unit trust strategy. (SIS Reg 13.22 C / D). It is very strict and there are many issues but if it can be used its often far far cheaper and more flexible than a LRBF. It can even allow individuals (ie you) to be a party to the ungeared unit trust with neg gearing on your interest while the fund is +ve geared at low rates of tax.

    The ungeared UT strategy can help in situations where the fund has build equity and (obviously) cant release it.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    It would save very little in reality. The bare trust (unlike a furry bear trust) deed [I prefer to call it a custodian trust since its not really a bare trust] itself is not that expensive on its own. The saving is in the ASIC annual fee and saving cost of a new company trustee.
     
  8. See Change

    See Change Timing Lord Premium Member

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    Paul

    I've previously had my spelling corrected. via pm , but we called our bare trusts , yogi , teddy and even bo bo :eek: , so I'll keep calling them bear trusts :cool:

    Cliff
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I also agree that they are not bare trusts - because the beneficiary cannot demand transfer of title until certain conditions are met.