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Lending to smsf

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Quixotic1, 30th Jul, 2009.

  1. Quixotic1

    Quixotic1 New Member

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    Hi All
    First post and mainly joined to ask about the following scenario. Im not asking about wether its advisable from an investing point of view so much as from the point of view of if its allowable and if not what would have to be done to satisfy the ATO.

    1. the Bloggs SMSF buys two blocks of land @ $40K each total $80K

    2. MR & MRS Blogs, not their smsf, set up the correct agreement legally and lend $100,000 K to the Bloggs SMSF at say 6% interest only loan and recieve
    $500 month interest($100,00x 6% /12).

    3. Bloggs SMSF purchases 2x kit homes for $30k each($60k total) and gets them put up or puts them up themselves if allowable by which time the additional $40k left from the loan has been spent on labour ,sparkies plumbers etc. So all the loaned monies have been spent by the SMSF for the SMSF.

    4.The two houses can now be rented out for a minimum of say $150 week, $1200 a month less managment fees and any other costs, $500 a month which would be intrest on the loan paid to MR and MRS Bloggs .

    5. At the end of the loan term say 10 years the principal is repaid to MR and MRS Bloggs.

    As you can see the ATO is not getting shortchanged and actually insist that the loan intrest reflect the market . Your not trying to get out of anything except that youve cut out the lending institutions margin, the extra cash the bloggs recieve can be put into the super or spent or saved, you have a very understanding lender who if times get tough wont take your asset (would it matter if they did?) It sounds too good to be true so probably is as the saying goes but as far as i can see the Ato doesnt prohibit lending to an smsf by a related party as long as the structure of the loan is correct. The only ones to dip out are the Banks.

    Remember im not asking wether its advisable but wether its allowable and if not what could be done to have the ATO allow it.

    Cheers Tim
     
  2. SMSF Strategies

    SMSF Strategies SMSF Strategies

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    Gold Coast
    SMSF Strategies

    Hi Tim,

    This might give you a starting point. If you need more assistance feel free to contact us directly.

    Regards Amreeta Abbott
     

    Attached Files:

  3. Billv

    Billv Getting there

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    Tim

    It sounds doable provided you have the loan docs written by a professional.

    The companies which sell SMSF docs also write loan docs (through a legal firm) and should be able to amend those to suit your particular circumstances.

    talk to
    Peter johnson of
    CST Corporate Solutions

    or
    manoj of
    TRUSTDEED.COM.AU Deeds you can trust
     
  4. Quixotic1

    Quixotic1 New Member

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    Thanks for that guys ,i've done some more searching and not only is it doable but has some verry interesting implications. You can lend to your smsf, but you can also borrow personally and lend the money to your smsf.

    The thing is that financial institutions lending to smsf's come up against two problems , increased risk due to limited recourse (ie can only access the asset that the money was lent for) and the ATO's dislike of the implications of a personal guarantee in association with an SMSF. So the institution counters by charging a higher interest rate for loans to smsf's up to 3% higher . So you personally borrow the money at say 6% and then lend at say 9% to the smsf. As long as it can be argued the rate is within the standard range for the industry the ATO is okay as the smsf would be paying that anyway and so therefore you are not making sneak contributings. So you get the 9% interst payment and forwatrd 6% to the lending institution keeping the 3%.

    WOW!
     
  5. Billv

    Billv Getting there

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    Quixotic

    I don't believe that the ATO would be happy with you charging a higher interest than what you are paying to your lender.

    Your SMSF can borrow from a lender which does not ask for a personal guarantee. eg ST George bank
     
  6. Quixotic1

    Quixotic1 New Member

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    Hi Billv

    It does sound too good to be true , but if you concentrate on the SMSF borrowing and its within the normal industry range then nothing untoward is happening, of course you would have to look at your personal circumstances to see if this was for you.
    http://www.dealersgroup.com.au/kb/cf26--dba_butler_article-2008-06.pdf
    is where i found the information outlining exactly the scenario i discussed above.
    For my situation it wouldnt suit but the instances where the super laws are or seem to be in our favour are few and far between so its worth noting.
    Of course the earnings on the interest would be taxed as personal income so in fact the ATO gets thier slice of the action regardless.

    Cheers Tim
     
  7. Billv

    Billv Getting there

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    Tim

    The article does state that you can't charge more than commercial rates which is what I was referring to.

    "Money advanced by a related party at greater than a commercial interest rate of interest may result in a breach of the sole purpose test (FN8)"

    However, if you could borrow from a lender @ lets say 5% and then lend it to your SMSF at the standard commercial rate of 5.75% that would be ok.

    If you did charge your SMSF 3% more
    eg 8% then IMO your SMSF auditor would be asking questions
    and he would have to be satisfied that you've attempted to get a lower commercial rate (without personal guarantees) and for whatever reason it was not available to your SMSF.

    At the moment StGeorge offer a variable SMSF rate of 5.75%
    If you applied for a loan with them and they declined so you would have to go to another lender which charges 10% and there were no other lending options then in that case IMO 10% would be an acceptable commercial rate.

    IMHO
     
    Last edited by a moderator: 2nd Aug, 2009
  8. ChristopherB

    ChristopherB New Member

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    Be careful what you spend the borrowed money on …

    Hi Tim

    One thing you need to be careful of is that 100% of the borrowed money must be used to “acquire” an asset. So your plan of using some of the borrowed money to pay for tradies etc. is, sadly, going to raise a compliance issue.

    You can see an article by the lawyers at Maddocks here: SMSFs & Instalment warrant arrangements | ClearLaw Legal Bulletin | Australia

    Towards the end of the article, it says: "100% of the loan must be used to pay the asset's price — that is, the loan money cannot be used to pay any fees, stamp duty, etc.”

    Hope that helps

    Ciao
    Chris
     
  9. Billv

    Billv Getting there

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    Chris

    However, if the money mr & mrs blogs lend to the SMSF
    was used to buy the land, (acquire an asset)
    then the SMSF would still have it's own money ($80K)
    which could then be used for the construction of the 2 properties.

    Wouldn't that work?
     
  10. ChristopherB

    ChristopherB New Member

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    Hi Bill

    It's the loan money that can't be used to pay tradies etc.

    The other money in the SMSF can be used for anything allowed by SIS etc.

    (I'm not sure where the $80k you refer to comes from in Tim's example.)

    Ciao
    Chris
     
  11. Billv

    Billv Getting there

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    It came from Tim's 1st post

    So we've decided that if the SMSF borrowed the money to buy the land instead of using own SMSF funds it would be more appropriate.

    However, if the Blogs had already spent the SMSF money and their only option left would be to borrow for the kit homes, another possibility I've thought of would be for mr & mrs Blogs to borrow money themselves and pay all DA and construction costs for the 2 homes.

    The Bloggs then could sign an agreement with the SMSF so that the homes become the property of the SMSF and in return the SMSF will be collecting the rents and will be using the rent money to repay the loan to mr & mrs bloggs lender.

    It gets a bit complicated and if I wanted to go down this path I'd ask the ATO for a private rulling but it sounds doable.

    cheers