New: Amendment to SMSF borrowing

Sharmistha Bose, Product Marketing Specialist

In response to your feedback, Cleardocs is pleased to introduce the new Amendment to SMSF borrowing document package. This document package allows you to vary the Declaration of Custody Trust (Custody Trust Deed) that the SMSF purchased as part of the SMSF borrowing (bank) document package and which has been signed. It assists to easily resolve common lender issues with your existing Custody Trust Deed and pre-populates details from your SMSF borrowing (bank) document package order. You can order a Cleardocs Amendment to SMSF borrowing for $308.00 inc. GST. What changes to the Custody Trust Deed are covered? Sometimes, the lender and the details of the authorised investment change after the Custody Trust Deed has been signed - and the lender may require the Custody Trust Deed to be varied to address the changes. The Cleardocs Amendment to SMSF borrowing document package covers the following variations to the Custody Trust Deed: change in lender; and change of any other details of the authorised investment in the schedule to the Custody Trust Deed (such as the loan amount and settlement date). What documents are included in the Cleardocs package? The document package includes: the Deed of Variation that varies the SMSF's existing Custody Trust Deed; and  an Establishment Kit explaining what to do next.  Is a Cleardocs Custody Trust Deed required for this document package?     Yes. To use this document package, the SMSF needs to have a Cleardocs Custody Trust Deed purchased as part of the SMSF borrowing (bank) document package. This package is intended to supplement the SMSF borrowing (bank) document package and is drafted for consistency with those borrowing documents. As with all our packages, the legal documents are signed off by top-20 Australian law firm, Maddocks.  Any questions? If you have any questions about the Amendment to SMSF borrowing or any of our other products, please contact our free helpline on 1300 307 343. +Cleardocs Thomson Reuters

SMSF borrowing with Cleardocs: Clarifying the steps

Lisa Galbraith, General Manager Cleardocs

Borrowing through your Self Managed Superannuation fund continues to be an important strategy for trustees.  At Cleardocs, we often have customers asking how to get started.  This blog highlights some of the useful resources on Cleardocs and the document order process.  Obviously, any borrowing arrangement needs to be carefully considered.  We always recommend our users obtain professional legal and financial advice as Cleardocs cannot (legally) provide this.

The process

Step 1:

You must have an existing SMSF trust deed that allows borrowing.  If your deed was established before July 2010 and has not been updated since then, it is unlikely to have the borrowing clauses that the banks like to see.  The banks are looking for very specific wording in relation to borrowing; older deeds typically do not include the appropriate phrasing.  If you have a Cleardocs SMSF, you need to have a deed of version 11 or greater.

Step 2:

Meet with your lender to clarify the necessary structures and borrowing limits.  For example, the bank may want the trustee of the SMSF and/or the trustee of the bare trustee to be a company.

The corporate trustee for your bare trust cannot be the same as your SMSF corporate trustee. In this instance, you will need two companies.

Step 3:

With the understanding of your preferred lender's requirements, you can create the necessary borrowing documents through Cleardocs.

If you need to change your SMSF trustee, you must first order the SMSF Change of Trustee document package from Cleardocs. Then, if your lender requires a corporate trustee for the bare trust, you will need to register a company  – Cleardocs company registration package does this for you.

Cleardocs has two borrowing packages – SMSF borrowing (bank) and SMSF borrowing (related party).  This will be the final package of documents you need. 

Once you have completed the packages, our lawyers at Maddocks recommends you provide the unsigned borrowing package (together with your SMSF documents) for your lender or bank  to review – this is because it is much easier to make changes when the document is unsigned.  lender

Step 4:

Once all the parties are satisfied with the documents you are ready to purchase the required assets.

Resources

The legal structures and parties involved with borrowing can be complicated.  To help you through the process, Cleardocs with our lawyers at Maddocks have developed a number of helpful resources.  Our borrowing product page is the best place to start.  Look out for:

Interactive graphic

Detailed information

ClearLaw articles on a wide range of SMSF topics

As always, please call the Cleardocs Helpline on 1300 307 343 if you have any questions.

+CleardocsThomson Reuters

Top 10 ClearLaw articles to help you keep up-to-date

By Thomas Lam

Articles prepared by top 20 law firm – Maddocks – since 2005

ClearLaw, first published back in August 2005, is a monthly newsletter of articles about current legislative issues concerning SMSFs, CompanyRegistration, DiscretionaryTrusts and more. The articles are usually authored by relevant lawyers from Maddocks or Thomson Reuters' senior tax writers.

All Cleardodcs users receive an email alert once the articles are published on our website and can read these articles for free.

In this blog, I would like to share with you the 10 most popular ClearLaw articles to date:

1. UpcomingSMSF administrative changes: early discussion with the ATO Mar 2014 – upcoming legislative changes affecting SMSFs outlined by an ATO senior officer.
2. Companiesvs Sole Traders: Things you need to consider May 2010 – looks into some of the issues you need to consider when deciding whether to operate a business as a sole trader or through a "Pty Ltd" company.
3. ATOprovides warning on SMSFs which lend money (NOT borrow money) Sep 2011 – warnings from the ATO about SMSF trustees entering into lending arrangements on behalf of the SMSF.
4. Changeof SMSF trustee: practical tips for LRBAs Mar 2014 – tips and guidance to SMSF trustees to help them comply with their duties under superannuation law and LRBA documents.
5. Jointventurers v. Partners: Do they owe the same duties to one another? Jul 2007 – discusses two court decisions suggesting joint venturers owe one another the same fiduciary duties as partners.
6. CorporateTrustee v Individual Trustee: Key Differences for SMSFs Apr 2011 – highlights the advantages and disadvantages of choosing a corporate trustee over an individual trustee for a self managed superannuation fund and other trusts generally.
7. SMSFMembers overseas? Beware the residency trap Nov 2006 – an interesting and relevant read for any SMSF member who plans to stay overseas for more than two years.
8. Overviewof some things to consider when registering an Australian company Mar 2010 – a guide to some of the issues you need to consider when registering a 'proprietary limited' company.
9. Electronicsignatures: when are they effective? Nov 2013 – identifies risks and tips for dealing with electronic signatures.
10. Understandingthe differences between an agreement and a deed: lessons from 400 George Street (Qld) Pty Ltd v BGInternational Ltd Feb 2013 – discuss how deeds and agreements are distinct in two principal ways.

I hope you will find these articles interesting and useful. You can read our most recent ClearLaw articles here. Feel free to forward us topics you would like our lawyers to cover as ClearLaw articles.  Please note that ClearLaw articles are up to date at the time they are published. Old articles are not updated to reflect changes in the law.

SMSF limited recourse borrowing arrangement. What to do when important information is unknown or unavailable.

By Mahjabeen Khan, Customer Support
 
This has been a question from Cleardocs customers for some time now, so I thought it would be helpful to address it in our blog. 

I recently joined the Customer Support Team at Cleardocs and have been assisting customers with questions about our products since August 2013. I've come to realise that customers feel more secure when they are referred to published information. It assures customers of the authenticity of information and if it’s displayed on the company’s website, it is reviewed and approved by subject matter experts.

Let’s look at the ‘Loan’ section on the SMSF borrowing interface. Help text guides the user how to complete the interface when information is unavailable. (for example, the loan amount, the loan term and the settlement date) 

Figure: 'Loan' section - SMSF borrowing interface

• The question: Let’s start with the questions in the form. The help text which pops up when you click the information icon, prompts the user to ‘type in xxxx (or something)’ when information is unavailable. Some customers get confused about the help text thinking that it applies to all the questions they don’t have an answer for. You can enter ‘xxxx’ in loan amount field, however, the loan term and settlement date, even if it’s an estimate must be entered. The settlement date must be in date format.
• The issue: On Maddocks’ advice, we generally warn our customers not to sign any documents which contain incorrect or only approximate information. As a result, customers are wary of presenting draft SMSF borrowing documents to the bank for review. Some customers have questioned why we need this information at all, at a stage where it’s not yet available.  
• The solution: The exception to the rule for not signing documents with incorrect information is the SMSF borrowing documents packages. Over the years, we’ve worked extensively with banks to tailor the borrowing documents to each bank’s specific requirements. Any documents you show to the bank or your client (if still in draft format) can be changed. The banks have provided this assurance.   

If you keep the above points in mind, this should satisfy the lender’s requirement. All our documents have been signed off by top 20 Australian law firm, Maddocks.

For more information on this or other SMSF matters,  just give us a call on 1300 307 343 or send us an email at support@cleardocs.com and we'd be more than happy to help.  

+Cleardocs Thomson Reuters  

SMSF Borrowing: variable interest rates and interest only loans

By Christopher Balmford, MD

Several people have asked whether the Cleardocs documents for SMSF Limited Recourse Borrowing are suitable for either of:

• a loan with a variable interest rate; or
• an interest only loan.

The answers depend on whether the lender is a bank or a related party of the SMSF.

. . . and the answers — which our lawyers at Maddocks have given us — are . . .

SMSF Borrowing from a bank

If the lender is a bank, then the Cleardocs SMSF borrowing documents are suitable:

• for a loan with a fixed interest rate or a variable interest rate; and
• for an interest only loan.

The arrangements about the interest rate and about what is being repaid are in the loan documents — which the bank (not Cleardocs) provides.

SMSF Borrowing from a related party

Fixed/variable interest rate If the lender is a related party, then the Cleardocs SMSF borrowing documents are suitable for:

• a loan with a fixed interest rate. Although they are not suitable for a loan with a variable interest rate, we can arrange for you to contact our lawyers at Maddocks for a free quote for the firm to manually change your documents to allow for a variable interest rate.
• a loan in which both the interest and the capital will be repaid. Although they are not suitable for an interest only loan, we can arrange for you to contact our lawyers at Maddocks for a free quote for the firm to manually change your documents to allow for a variable interest rate. (Also we are discussing with Maddocks whether to modify our documents so that you can order directly from us a document package that is interest only. We’ll keep you posted.)

What to do? If you need a document package for a loan from a related party that is interest only or that has a variable interest rate, then call us on 1300 307 343. We will arrange for you to contact Maddocks for a free quote for the firm to manually change the Cleardocs documents to meet your needs.

If (after Maddocks has given you the quote) you decide to proceed, then here’s what to do:

• First you order the normal Cleardocs $599 SMSF Borrowing (related party) document package.
• After you order the documents from Cleardocs, you email them to Maddocks and instruct Maddocks to manually change the documents to allow for a variable interest rate or an interest only loan. You can discuss this with Maddocks when you order.
• Maddocks will manually change the documents you ordered through Cleardocs to suit your needs. Maddocks will then send those documents to you ready for signing.

More information

You can read more information about our SMSF Borrowing documents here — for example, what’s included in each package.

SMSF Borrowing to acquire multiple assets — reduced prices from Cleardocs

Christopher Balmford, MD

If an SMSF needs multiple SMSF borrowing document packages, Cleardocs has reduced prices for the second and later orders. The discount is useful for SMSF trustee(s) who are acquiring more than one asset through more than one SMSF borrowing — whether at the same time or over a period, . . . even a lengthy period.
We can also help those SMSF trustee(s) and their advisers by automating an “order-replication process” for multiple orders. How many? . . . Well:

• several of our customers have needed a dozen or so SMSF borrowing document packages for the one SMSF; and
• one of our customers needed more than 100 document packages for the one SMSF. And he needed them all on the same day . . . our automated “order-replication process” saved him and his staff a lot of repetitive typing.

The full stories are below.

Why is the multiple order price reduction required?

The price reduction is in response:

• to the 7 July 2010 law change about SMSF borrowing — which clarified that each SMSF borrowing can be used by the SMSF’s trustee(s) to acquire only one asset, see below; and
• to customers who — to comply with the law — need a separate document package for each borrowing.

What does the law require about acquiring only “one asset” — especially shares?
Although the law changes that came in on 7 July 2010 confirm that for each borrowing the SMSF’s Trustee(s) make they can acquire only a “single acquirable asset”, there is a useful clarification for shares etc. The clarification is that the concept of “single acquirable asset” covers:

• a holding of shares in a company, a holding of units in a trust, or a holding of stapled securities (that is, shares in a company that are stapled to units in a trust);
• as long as that holding is of shares, or units, or stapled securities of the same class with the same market value.

For example, if the SMSF’s trustee(s) borrow to buy 10,000 ordinary shares in company X at $1.00, then that holding is seen as one asset. If the SMSF trustee(s) want to borrow to acquire another 2,000 of those shares at $1.04, then that second holding is a separate asset — and it requires a separate borrowing and a separate set of SMSF borrowing documents.

Similarly if the SMSF trustee(s) were to acquire 2 properties at the same time — each on a separate title — then the trustee(s) would need a separate borrowing and a separate set of SMSF borrowing documents for each property.

What sort of SMSF needs a dozen or so SMSF borrowing packages?
One of our customers is arranging for his own SMSF to borrow a fair amount from one of his related entities. Over the next few months or so, his SMSF’s trustee wants to use the loan money to acquire shares in about 12 different companies.

The new law makes clear that each time the trustee of his SMSF acquires shares — of the one company, in the same class, and at the same price — the trustee is acquiring a separate asset. Therefore:

• each time the Cleardocs customer acquires a separate holding, he needs a separate borrowing; and
• each of those holdings must have a separate set of documents — including: a separate loan agreement, a separate security document, and a separate declaration of custody trust (under which the custodian holds the asset on trust for the SMSF).

. . . and what sort of SMSF needs more than 100 SMSF borrowing packages on the same day?
One of our accountant customers was acting for a client who was buying more than 100 car spaces (before the recent law change). As each car space had its own Certificate of Title his bank took the view that each of them was a separate asset. Therefore, each car space needed to be covered by a separate borrowing and so required a separate set of documents. (By the way, our customer’s client was borrowing the money from one of the big 4 banks — apparently, the bank manager was somewhat irritated at having to prepare so many sets of loan documents.)

How does Cleardocs automate the “order-replication process”?
For the customer ordering the document packages for the 100+ car spaces, each order was going to be identical — other than for the Folio number on the Certificate of Title. So our IT Manager, Thomas Lam, wrote a bit of code that:

• created each new order;
• gave each new order an identifying name (which included the Folio number); and
• pre-populated each set of answers for each of the other 100+ orders — even to the extent of automatically changing the Folio number for each order.

We reckon Thomas’ bit of code saved our customer at least 10 minutes for each order — that’s more than 1,000 minutes, or more than 16 hours, of repetitive typing saved.
To make sure the automation was working properly, we did the first 3 orders one-at-a-time for our customer to check. He checked and confirmed they were correct. Then in one click we did the other 100+ orders for him.
It’s fair to say our customer was delighted by the efficiency delivered by the Cleardocs IT, and by Thomas. And he appreciated the significant discount we gave him too.

What are the reduced Cleardocs prices for multiple orders?
Cleardocs has reduced prices for the second, third and so on (even the 100^th) of the same type of borrowing package for the same SMSF to a flat $99 a package.
Here’s how the discount works for the 2 customers mentioned above:

• the Cleardocs customer buying shares in a dozen companies through a borrowing from a “related party”, pays the full fee ($598) for the first related party document package. But pays only a flat $99 for each related party borrowing package they buy later for the same SMSF; and
• the Cleardocs customer buying 100+ car spaces through a borrowing from a “bank”, paid the full fee ($199) for the first related party document package. But paid only a flat $99 for each of the other bank borrowing packages they bought.

The fact that one of those customers will order their SMSF borrowing packages over a few months and the other did them all on the same day is irrelevant. The discount applies to all orders of the same type of document package for the same SMSF throughout that SMSF’s life.
(By the way, the main difference between the Cleardocs documents package for a “bank” lender and a “related party” lender is that the “related party” package includes a loan agreement and, if the asset being acquired is a holding of shares etc, it also includes a security document.)

Did the law changes on 7 July clarify anything else?
Yes, the 7 July law change also clarified that:

• The borrowed money can be used to meet expenses incurred in connection with the borrowing;
• If the original asset purchased is shares, units, or stapled securities, then the original asset can be replaced — but only with shares, or units, or stapled securities, in the same entity and in the same class and of the same market value; and
• The SMSF can refinance its borrowing.

More Cleardocs information on SMSFs
You can read other articles concerning superannuation and SMSFs here.

Order SMSF related document packages
Set up an SMSF
Update an SMSF deed
Set up an SMSF pension
Arrange SMSF borrowing lending docs:

• for when the lender is a bank
• for when the lender is a related party

Set up an SMSF corporate trustee
SMSF Death Benefit Nomination - binding or non binding
SMSF Death Benefit Agreement - binding or permanent

New SMSF Borrowing rules

Danni Kirwan, Marketing Executive

On 7 June 2010, changes were made to the law on borrowing through Self Managed Superannuation funds (SMSFs). If you are considering borrowing through your SMSF, or are already in the process of preparing to borrow, these changes may affect you.

All Cleardocs documents are up to date. As always the changes were developed and signed-off by our lawyers at Maddocks.

So what are the changes?

Most noticeably, the name for SMSF Borrowing arrangements has changed from “Instalment Warrant Borrowing arrangements” to “Limited Recourse Borrowing arrangements”. Other key changes are:

· The borrowed money can also be used by the SMSF to pay borrowing related expenses including stamp duty, conveyancing fees and loan establishment costs. Under the old arrangement, it wasn’t clear if funds could be used for these sorts of expenses.

· The SMSF can refinance its borrowing.

· The SMSF can use the borrowed money to purchase a ‘single acquirable asset’, which can include a collection of shares in a company or a collection of units in a unit trust – so long as the shares or units acquired are of the same class with the same market value.

These changes are expected to be welcomed by SMSF Trustees, as they provide greater clarity than the previous rules as well as, generally, more flexibility.

How do the changes affect the Cleardocs documents?

The Cleardocs SMSF borrowing packages and SMSF deed were updated, on the advice of Maddocks, on Friday 9 July in accordance with the law changes.

If you haven’t yet started the borrowing process, then:

· Any new SMSFs set up are capable of Limited Recourse Borrowing

· To purchase an SMSF Borrowing package from Cleardocs, the SMSF needs to have a deed that was created or updated on or after 9 July 2010.

If you’ve paid Cleardocs for your SMSF Borrowing documents but the loan has not yet started, then you need an updated version of the Cleardocs documents, please call us on 1300 307 343 and we will arrange the new documents for you for free.

If your SMSF borrowing is already in place, then you don’t need to do anything about the documents. They are fine as they are.

What do you think about the changes?

We’d love to hear your thoughts on the SMSF Borrowing changes. Do you think the new rules help to clarify the SMSF Borrowing process? You can leave your comments below.

Need more information?

For a more comprehensive review of the changes, Maddocks have prepared the following ClearLaw articles on the topic:

Super fund borrowing rules: proposed new laws making things clearer

SMSF Borrowing: Cleardocs documents updated to reflect changes in the law

Related Cleardocs Documents

Self Managed Superannuation Fund (SMSF) set up $137.50

Update to SMSF $99.00

SMSF Borrowing (bank) $198.00

SMSF Borrowing (related party) $599.50

SMSF Borrowing with Cleardocs – the process

Danni Kirwan, Marketing Executive

A number of our blog posts and ClearLaw articles over the past year or so discuss SMSF borrowing, — it continues to be a popular topic. Many people are unsure about the process, and what documents are required. Below, I set out the process, and the documents required, to get your SMSF borrowing ready through Cleardocs.

Overview

In overview, here’s what you need:

• An SMSF
  
• The SMSF needs an up to date Cleardocs deed
  
• Usually, the SMSF needs a corporate trustee — check with the lender
  
• You need an SMSF borrowing document package which includes a Declaration of Custody Trust
  
• Usually, the Declaration of Custody Trust needs a corporate trustee — check with the lender. Importantly, if you do need a corporate trustee for the Declaration of Custody Trust, then that company must be a different company from the one that is the SMF trustee (so you are likely to need two companies)

So you may need to:

• Set up an SMSF
  
• Update an existing SMSF’s deed
  
• Register a company, or two
  
• Change the SMF’s trustee to a corporate trustee

You’ll definitely need to order an SMSF borrowing package.

Before you start, find out the lender’s requirements.

Here’s the process step-by-step

Step-by-step

Step one: Have you got company trustees? You may need two

Most banks lending to SMSF’s require that both the SMSF and the Declaration of Custody Trust (contained in the SMSF Borrowing packages) have corporate trustees. This means you need two companies.

If you need to register one or both of them, then you can do so through Cleardocs.

For the company that is going to act as the trustee of the SMSF, make sure you tick the “Yes” box in the question interface that asks if the company will act solely as the trustee of an SMSF — as this will entitle you to a cheaper ASIC annual review fee.

You need to wait for ASIC to register your company before you continue with the next documents — as you will need the name and ACN number of the corporate trustee to complete the forms for the SMSF and for the borrowing package.

Step two: Set up SMSF, or update existing SMSF to Cleardocs deed

If you already have an SMSF with an up to date Cleardocs deed and with a corporate trustee, then you can skip to step 4 four.

To use the Cleardocs SMSF Borrowing packages, the SMSF will need to have a Cleardocs deed. This ensures:

• that your SMSF has the power to borrow in the first place; and
  
• that we know your SMSF deed works with any of the other related documents you purchase – such as the SMSF borrowing packages, or the Change of Trustee.

If you don’t already have an SMSF, then you can set up a new SMSF through Cleardocs for $137.50.

If you have an existing SMSF that does not have a Cleardocs deed, or that has an out of date Cleardocs deed, then you can update to the latest version of the Cleardocs deed for $99.

Step three: If required, change the trustee of the SMSF from individuals to corporate trustee

Most banks lending to SMSF’s are requiring the fund to have a corporate trustee. As I mentioned in my last blog post, many SMSF’s are also making the decision to change to a corporate trustee to enable easier administration in the circumstances of admitting or removing trustees, or the death of a trustee. Corporate Trustees can also allow for greater asset protection, and of course can enable a fund to operate with a sole individual as both the member and director of the corporate trustee.

If you have an SMSF that does not have a Cleardocs deed then you will need to update to a Cleardocs deed before you change the trustees. You need to update the deed with the funds current situation, and then use the Change of Trustee product to record the change of trustee/s.

If you are changing from individual trustees to a corporate trustee, then the document package Cleardocs provides will include a new trust deed as part of this package. This is because the deed differs depending on whether the trustee/s are individuals or a company.

Step four: Complete the SMSF Borrowing package

Cleardocs has two separate SMSF borrowing packages – one for borrowing from a bank, another for borrowing from a related party. Both packages require detailed information about the lender, the borrower and the asset to be purchased. To ensure you have all of the information required, it’s a good idea to download and complete the document checklist before you start filling out the online interface.

Have the lender review documents before you sign. It is much easier to change a document before it is signed than after it is signed.

More information

There’s more information about SMSF borrowing through Cleardocs:

• Self Managed Superannuation Fund Product Page
• Update to SMSF Product Page
• Change of Trustee Product Page
• SMSF Borrowing Product Page

Earlier blogs about SMSF borrowing:

• Instalment Warrants , SMSF borrowing, what's happening
• The banks and SMSF borrowing: remember the bank is acting for itself — not for the SMSF trustee(s)
• Part 1: Trading SMSF assets (and replacement assets) bought under an instalment warrant arrangement
• Part 2: Case studies of trading SMSF assets (and replacement assets) bought under an instalment warrant arrangement

As always, if you need more information you can call us on 1300 307 343.

Part 2: Case studies of trading SMSF assets (and replacement assets) bought under an instalment warrant arrangement

Christopher Balmford, MD

(For Part 1 on this topic, see the post on 16 September, 2009.)

Since the original blog post below, the law on SMSF borrowing - and the replacement assets issue - has been clarified. In particular, there are some useful comments in the Explanatory Memorandum issued with the Bill. The changes to the law were passed in late June 2010. They will receive Royal Assent in early July 2010.


You can download a copy of the bill and the Explanatory Memorandum here

Cleardocs reports on the changes, and on related developments, in ClearLaw articles here

Orginal post

How the legal documents might be affected under the options outlined in Part 1

If the SMSF trustee(s):

· trade in the normal way without repaying any of the loan (Option 1 in earlier post), then I think the instalment warrant documents continue as they are. But there are two main issues — a legal one and a practical one:

o The legal issue Is it OK for the SMSF trustee(s) to treat the newly purchased shares as "replacement assets"? and

o The practical issue Are the SMSF trustee(s) complying with their LVR limits? (See, Part 1 about LVRs.)

· repay all of the loan and keep the remaining proceeds of sale in cash or use it to buy
another asset (Option 2 in earlier post), then I think the instalment warrant arrangement comes to an end; and

· combine the proceeds of sale with money from a new loan to acquire another asset (Option 3 in earlier post), then we need to think hard about what happens to
the paper work for the instalment warrant arrangement.

Do you have any alternate views? It would be interesting to know the ATO’s views.

Also, as I said in Part 1:

· Maybe this topic is one that you might ask the ATO about under the new system that allows SMSF trustee(s) to applyfor a private ATO tax ruling on planned activities, see the ATO website here. If you do learn anything from the ATO (that you are allowed to disclose) about all this, we’d be delighted to learn about it; and

· These comments are preliminary thinking about what the answers might look like. So this
blog post is me sharing my thinking. Feel free to share this post with your colleagues, advisors etc. But you need to form your own view. And your colleagues, advisors etc. need to form their own views too.

Case studies of trading shares under SMSF borrowing — how it might work

Let’s look at some case studies to illustrate our discussion. Before we do, 2 thoughts:

· Generally, the case studies below are the same regardless of whether the lender is a bank
or a party related to the SMSF trustee(s); and

· Generally, the case studies below are the same for each of the assets in the narrow range of assets allowed to be acquired through SMSF borrowing — those assets are, primarily: commercial property, shares in a company (listed, or unlisted), units in a trust, fund or managed investment scheme (listed, or unlisted, and whether registered with ASIC or not). The facts in the case studies change if the asset is commercial property — as commercial property cannot be traded like shares or units. Even so, in each case study, the impact on the instalment warrant paperwork is the same if the asset is commercial property.

Facts for the case studies

For each of the case studies, let’s assume the SMSF’s trustee(s):

· have $50,000 cash to invest;

· borrow $100,000 through an instalment warrant arrangement; and

· buy $150,000 worth of shares in ABC Limited.

Case study for Option 1 — Buy and sell (and trade generally) in the usual way

	What the SMSF trustee does	The instalment warrant paperwork involved
Case study 1	· Sells some shares in ABC Limited · Uses the proceeds of sale to buy shares in XYZ Limited (but does not use any new borrowed money) · Continues to hold any remaining shares in ABC Limited	The instalment warrant arrangement can continue as is — as long as the value of the ABC Limited shares satisfies the lender’s LVR. However, if the ABC Limited shares don’t satisfy the lender’s LVR, then: · perhaps a lender (especially if it’s a bank) will handle this in the same way it handles the similar situation in a margin lending arrangement; and · the meaning of the word "replacement” in the law may become relevant. Perhaps, the “replacement” asset the legislation refers to is (in this situation) the shares in XYZ Limited. What do you think?
Case study 2	· Sells all of its shares in ABC Limited · Uses the proceeds of sale to buy shares in XYZ Limited (but does not use any new borrowed money)	Same as above for Case study 1.

Case studies for Option 2 — Repay the loan

	What the SMSF trustee does	The instalment warrant paperwork involved
Case study 3	· Sells all of the shares — and the proceeds of sale are more than the amount owing under the loan · Repays the full amount owing under the loan · Either keeps the remaining proceeds of sale in cash or uses them to buy another asset	The instalment warrant arrangement comes to an end. In that case, the paper work is fairly straightforward: · the loan agreement ends, · the mortgage or charge is discharged; and · the custodian trust (or bare trust) can be wound up or it may (if the deed allows — as the Cleardocs deed generally does) remain to be used later for another transaction.
Case study 4	· Sells the number of shares required to produce proceeds of sale equal to the amount owing under the loan · Repays the amount owing under the loan · Continues to hold its remaining shares in ABC Limited	Same as above for Case study 3
Case study 5	· Sells some of the shares — but the proceeds of sale are not enough to repay the full amount owing under the loan · Repays some of the amount owing under the loan · Continues to hold any remaining shares in ABC Limited	The SMSF trustee must observe LVR limits. Assuming the LVR limits are observed, then the instalment warrant arrangement continues as is. But the amount of the loan is reduced by the amount repaid from the proceeds of sale.
Case study 6	· Sells all of the shares — but the proceeds of sale are not enough to repay the full amount owing under the loan ! Hang on, … this one is tricky, and the situation is unlikely to happen. After all, if the SMSF trustee(s) try to sell the shares for less than the amount owing under the loan, then (depending on who the lender is) the lender is unlikely to release its security over the shares. In fact, if things are that bad, the lender may have already started to enforce its rights to recover the amount owing.	… The lender (depending on who the lender is) is likely to already be enforcing its rights: · under the charge over the shares; and · under any guarantee it has over assets outside the SMSF that are owned by the SMSF trustee(s) or anyone else. For more information on guarantees as part of SMSF borrowing, see here. http://www.cleardocs.com/clearlaw/superannuation/smsf-borrowing-risks.html

Case studies for Option 3 — Arrange a new loan and combine the amounts

	What the SMSF trustee does	The instalment warrant paperwork involved
Case study 7	· Sells some of the shares · Borrows another $100,000 from a bank under an instalment warrant arrangement · Combines the proceeds of sale and the second loan to buy shares in XYZ Limited	For the first loan, the instalment warrant arrangement continues as is — as long as the SMSF trustee(s) observe LVR limits. For the second loan, the SMSF trustee(s): · need a new loan document and a new security document (mortgage or charge); but · can add the new asset into the existing Declaration of Custody Trust — as long as: o this is allowed under the terms of that trust (it generally is under the Cleardocs deed); and o it is acceptable to the lender.
Case study 8	Same as Case study 7 in row above — except that the SMSF trustee(s) sell all of the shares	For the first loan, the instalment warrant arrangements ends as if the SMSF trustee(s) sell all the shares, then they must pay-out the first loan with the sale proceeds. For the second loan, … same as Case study 7 in the row above. ! But maybe it would be better to pay out the first loan, and then arrange one new loan and instalment warrant arrangement. What do you think?

More information, any questions

Let us know if you have any questions:

· comment below

· call 1300 307 343, if your questions are legal, we can refer you to the free legal helpline
at our lawyers, Maddocks

· email support@cleardocs.com

· read about the Cleardocs instalment warrant document packages for SMSF borrowing from a bank or from a party related to the SMSF trustee(s) http://www.cleardocs.com/products-smsf-borrowing-bank.html

· visit www.cleardocs.com

Comments welcome

That’s my preliminary thinking about all this. I welcome your comments below.

No advice Lastly, these are just my personal views. Neither Cleardocs nor I provide, or are licensed or authorised to provide, legal, commercial, financial, or taxation advice. You must obtain your own advice.

Part 1: Trading SMSF assets (and replacement assets) bought under an instalment warrant arrangement

Christopher Balmford, MD

Since the original blog post below, the law on SMSF borrowing - and the replacement assets issue - has been clarified. In particular, there are some useful comments in the Explanatory Memorandum issued with the Bill. The changes to the law were passed in late June 2010. They will receive Royal Assent in early July 2010.

You can download a copy of the bill and the Explanatory Memorandum here

Cleardocs reports on the changes, and on related developments, in ClearLaw articles here

Orginal blog post
An issue puzzling people about SMSF borrowing is what happens when the SMSF trustee(s) sell an asset (especially shares) bought under an instalment warrant arrangement. I know that our lawyers at Maddocks have received quite a few calls about this on our free legal helpline — and people asked about it at the breakfast seminar on SMSF borrowing that we ran with Maddocks, and with bankers from NAB and St George.
You can watch a video of the seminar here.
You can see some introductory information about instalment warrants — including an interactive graphic overview of how they work and the documents involved — here.
The main issues that people have raised on our free legal helpline are:

• If the SMSF trustee(s) buy shares in a listed public company through an instalment warrant arrangement, then what are the implications for trading those shares?
• When the shares are traded, what happens to the legal documents that record the instalment warrant arrangement?

If you attended the Cleardocs' Business Insights Breakfast Forum (in Sydney or Melbourne), or if you've watched the video of the Melbourne session, then you may remember Julian Smith (Partner, Maddocks) cautioning us all that the legislation is not entirely clear on what constitutes an "asset" and a "replacement" asset — particularly when it comes to share trading. To date, the ATO has not shed any light on this uncertainty.
I've been trying to think through the implications for SMSF trustee(s) when they trade shares bought under an instalment warrant arrangement.
Below, I set out where my thinking gets to. I'm keen to hear your comments and to know if anyone has heard from the ATO on any of this. By the way, I can't give advice (… and I'm not giving advice and I don't give advice). Instead, this blog post is me thinking through the issues and sharing my thinking. Feel free to share this post with your colleagues, advisors etc. But you need to form your own view. And they need to form their own views too.
An ATO private tax ruling on this would be handy ...
Maybe this topic is one that you might ask the ATO about under the new system that allows SMSF trustee(s) to apply for a private ATO tax ruling on planned activities, see the ATO website here.
If you do learn anything about all this from the ATO (that you are allowed to disclose), we'd be delighted to learn about it.
A thought about "LVRs" — Loan (amount borrowed) to value (value of shares) ratios are relevant
If you borrow against shares (or any other asset), then you provide the lender with security (say, a mortgage or charge) over those shares. So the lender is always concerned to compare the amount you owe it under the loan, with the value of the security which the lender holds – this comparison is known as "the loan to value ratio" or "LVR".
The LVR is a vital factor in this discussion and in the case studies which I'll post on this Blog a few days. A lender won't let you sell shares and keep the proceeds of sale if you leave the lender without enough security – that is, if it will result in you breaching your agreed LVR.
SMSF trustee(s) three options when selling the asset
It seems to me that, logically, the SMSF trustee(s) have 3 options when selling an asset (let's focus on listed shares) bought under an instalment warrant arrangement:

1. Option 1 Buy and sell (and trade generally) in the usual wayThe SMSF trustee(s) sell some, or all, of the shares and use the proceeds of sale to buy shares in another company. Effectively, the SMSF trustee(s) trade the shares in the normal way.
2. Option 2 Repay some (or all) of the loan When the shares are sold, the SMSF trustee(s) use the proceeds of sale to repay the loan. The trustee(s) then keep the balance of the proceeds of sale in cash or use them to buy another asset. However, the trustee(s) don't use the existing loan (for example, by redrawing on the loan) to buy another asset.
3. Option 3 Arrange a new loan and combine the amounts to buy an asset
   When the asset is sold, the SMSF trustee(s) can combine the proceeds of sale with money from a new loan to acquire another asset. I'm thinking this is what is meant by the concept of a "replacement" asset in the legislation, see section 67(4A)(b).

Let me know if you think of any other options.
I'm working on some case studies, I'll post them in a few days. If you want us to let you know when we publish the case studies, send us an email at mailto:support@cleardocs.com?subject=Part%202%20Trading%20SMSF%20assets.
More information, any questions
Let us know if you have any questions:

• comment below

• call 1300 307 343, if your questions are legal, we can refer you to the free legal helpline at our lawyers, Maddocks

• email mailto:support@cleardocs.com?subject=Part%202%20Trading%20SMSF%20assets

• read about the Cleardocs instalment warrant document packages for SMSF borrowing from a bank or from a party related to the SMSF trustee(s)

• visit http://www.cleardocs.com/