Attwood Marshall Lawyers Property & Commercial Partner Barry van Heerden discusses the types of borrowing by Self-Managed Super Funds and their benefits in Part 2 of the series on SMSFs. In Part 1, we reviewed the legislation governing borrowing by self-managed super funds.
Type of borrowing
Firstly, a few comments relating to the type of borrowing by self-managed super funds. The terminology used is “limited recourse borrowing” meaning the lender’s only security is the property purchased. In other words, the rights of the lender against a self-managed super fund for default on the borrowing is limited only to the property purchased.
This is a significant issue for banks. Traditionally banks required recourse over all of the borrower’s assets. This is not allowed under self-managed super fund borrowings.
It is also usually bank practice to require related parties to give personal guarantees for borrowings. In fact, many banks have been asking members of self-managed super funds to give personal guarantees.
The ATO has however flagged related party guarantees as a cause for concern. The ATO has stated related party guarantees “may result in recourse being made to the assets of the self-managed super funds other than the asset required” and this will be contrary to the intent that the borrowing only applies to limited recourse borrowings.
If the self-managed super fund has successfully negotiated a loan from a bank, it is necessary to consider the description of the Buyer in the contract.
The most common way and acceptable by the ATO is the purchase of the property in name of a bare trust acting for the self-managed super fund.
The bare trust holds legal title to the property on trust for the self-managed super fund. The self-managed super fund has a beneficial interest in the property and a right to call for a transfer of legal title when the loan is repaid and the mortgage is discharged.
The bare trust must hold no other assets or business interest and its sole function must be to hold the property on trust for the self-managed super fund. We note the ATO has indicated that a unit trust cannot hold an asset “on trust” for a self-managed super fund.
As mentioned the Buyer in a contract under these circumstances should be the Trustee of the Bare trust. In addition, we insist a special condition in the Contract stating the parties acknowledge the buyer is buying the property solely in its capacity as Bare trustee for the self-managed super fund.
The purpose of this special condition is to avoid any stamp duty implications in the future when the bare trustee transfer the property to the super fund. If the contract does not contain the special condition further investigations are required to provide evidence to OSR to confirm the intention of the bare trust was only to hold the property on trust for the super fund otherwise stamp duty may be payable again
Declaration of trust
We highly recommend the parties to enter into a Declaration of Trust between the self-managed super fund and the bare trustee to avoid any doubt the bare trustee is acting solely as bare trustee for the self-managed super fund.
It is important for parties wish to buy property in their super fund to also consider the following and obtain financial advice:
- The purpose of the purchase -residential or commercial;
- If the property is going to be rent out. There are strict guidelines if the lessee is a related party and should preferably be avoided;
- the return on the investment for the super fund. The return should be at least market related;
- tax consequences of buying and renting property