For some time I have been working to find a better way to borrow in a Self Managed Superannuation Fund avoiding the penalty interest rates applied to SMSF Loans after the withdrawal of the Big 4 and Macquarie leaving non bank lenders to dominate the SMSF space. We were also of the belief that the bare trustee was able to “maintain” a borrowing, our lawyers agreed however the ATO were never supportive.
The good news is that in 2020 the ATO finalised the following legislative instrument (LI) Under s71 of the SIS Act, the ATO has the power to exclude an asset from the definition of in house assets. The LI ensures that an investment by an SMSF in a related trust that is in connection with an intermediary limited recourse borrowing arrangement and complies with s67A of the SIS Act, is excluded from being an in house asset of the SMSF as described in the LI.
Therefore under the LI, it is possible for the Bare Trustee to borrow. However the following must be met:
- Members of the SMSF are the only trustees or shareholders and directors of the Trustee
- The SMSF Trustee is a beneficiary of the holding trust
- The bare trustee holds an acquirable asset on trust for the SMSF Trustee who is a beneficiary entitled to the acquirable asset or property
- The acquirable asset is a single acquirable asset i.e. one title
- The bare trustee enters into a borrowing as principal with the lender – secured by a mortgage by the lender over the acquirable asset
- The loan contract between the bare trustee and the lender may not limit the lenders right of recourse, under the contract or deed, to only the acquirable asset in the event of default
- The lender may still require a personal guarantee
The above arrangement will be established by legally binding deed under which the SMSF Trustee and Bare Trustee agree for:
- SMSF Trustee to maintain all borrowing obligations entered into by the bare trustee
- SMSF trustee is entitled to income from the acquirable asset
- SMSF trustee has the right to acquire the legal title of the Asset on completion of the borrowing
- The rights of the bare trustee or any guarantors against the SMSF Trustee in connection with the default on the borrowing is limited to the acquirable asset i.e. property
- The documentation must be disclosed to the lender
The LI provides greater flexibility for SMSF Trustees in borrowing to buy property in a SMSF. This is advantageous as SMSF loan rates have not reduced as much as standard residential home loans due to the lack of lenders and competition in the market where interest rates are still around the 5% range. With the bare trustee as borrower, you will be able to obtain a standard company interest rate which will be a massive benefit for your SMSF net cash flow over a 30 year loan term.
Disclaimer – The content has been prepared by Redwood Wealth Pty Ltd & Redwood Advisory Pty Ltd without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. This article should not be considered personal financial advice as it is intended to provide factual information only. Ivan Filipovic is an authorised representative of First Mutual (AFSL 423710). Redwood Wealth is a Corporate Authorised Representative of First Mutual (1244359)