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

Cleardocs Breakfast Seminars - SMSF Borrowing

Danni Kirwan, Marketing Executive

Earlier this week, Cleardocs hosted seminars in Melbourne and Sydney focusing on SMSF borrowing through instalment warrant arrangements. We’ll be posting a video of the seminar on the Cleardocs website in mid August.

We organized the seminars in response to the large number of queries we were getting on our helpline about our new SMSF borrowing products.

The Seminars were presented by Julian Smith, a partner at Maddocks. Some of you may have spoken to Julian over the years on our legal helpline, or seen him present at our previous seminars; Fiona Da Silva from St George Bank in Melbourne, and Wayne Scott from NAB in Sydney.

We had a great turnout from Cleardocs customers keen to find out more about this relatively new opportunity. Our audience proved quite inquisitive, challenging Julian, Fiona and Wayne with some tricky questions — you can see it all on the video.

The banks gave a great insight into their restrictions and considerations for instalment warrant borrowing, and pointed out some of the things commonly overlooked. Did you know:

• that a property held under an instalment warrant arrangement can’t be used to secure an overdraft? And
• that an arrangement using funds borrowed through an instalment warrant can’t be refinanced? Though Julian did outline an innovative solution he arranged with a bank for one client.

One of the points Julian, Fiona and Wayne all made was to allow plenty of time to set up the arrangement – they suggested it takes 6 to 8 weeks for the banks to process an instalment warrant application. So keep that in mind if you’re planning to settle on a property!

For those of you unable to attend the seminars, we’ll be posting a video of the seminar on the Cleardocs website in the coming weeks. In the meantime, you can find more information on SMSF borrowing in our previous blog posts, and ClearLaw articles written by our lawyers at Maddocks.

It was great to meet some of our customers face to face at the seminars after talking to so many of you on our helpline. Seminars are also a great way for us to keep you informed about products and issues that are relevant to you.

If you have any questions about SMSF borrowing, or about any of our other products, let us know in the comments section below, and we’ll get back to you. We’d also love to hear about any ideas you might have for future seminar topics. Or, if you were at the Seminar, we’d love to know what you thought.

Instalment warrants – working with your bank

Lisa Galbraith, CEO

 

As an SMSF trustee, I've recently been discussing the SMSF borrowing possibilities with friends – what a spread of views there are.

Every day, the interest (and Cleardocs helpline calls) about borrowing through an SMSF are increasing. People seem more positive about their economic outlook — or maybe they're just trying to recover some of the lost value in their funds. Trustees want to learn and are keen to understand the rules and the pitfalls and "what does the bank need?"

In the current credit environment, the banks are even more focused on their bottom line, on keeping their risk profiles down, and on passing any risk they can to someone else. Combine this with the newness of borrowing in a super fund, and your bank could be sending you through some pretty confusing hoops with pretty "interesting" fees.

As SMSF trustees, we need to make sure that a loan that works for the bank — works for us too. The fact that a bank lets SMSF trustee(s) structure a loan a certain way, or borrow to buy a particular asset, does not mean that superannuation law allows that structure, or allows the trustee(s) to acquire that asset for the fund.

Here at Cleardocs, we see the banks caution in their internal processes – in particular their document requirements. Although SMSF law is federal and the banks are national, the approach the bank branches takes is far from consistent. Sometimes, for example, a branch in NSW requires different words in the documents than a branch from the same bank in Queensland. This must be adding to costs, delay, and frustration.

We are working to ease this pain for our customers by tailoring our documents for each specific bank. (We can do this only once a bank settles a national position.) But it is clear from the calls we get that the bank that sorts out its processes first will draw the crowd.

Next week, Cleardocs is hosting an SMSF borrowing breakfast seminar with our lawyers and representatives of some banks. (Look out for the video of the event on our site).

As a trustee, I am looking forward to getting some clarification around what the banks want and why they charge so much in fees!

 

 

Instalment Warrants, SMSF borrowing, what’s happening

Christopher Balmford, MD

I reckon it would be good to get a discussion going in the 'Cleardocs community' — that is among: Cleardocs, Maddocks, and the people who use Cleardocs — about 'instalment warrant arrangements' and SMSF borrowing: who is doing what and why? … the banks, … the regulators, … SMSF members, and their advisors.

We thought we'd kick things off with our first blog.

You can read what we already know about instalment warrant arrangements for SMSFs in this article — which has a link to an interactive graphic overview about how instalment warrant arrangements work: the asset's journey to the trustees, the documents involved, and some of the emerging issues

Rather than repeat that article as a blog, here are some questions to trigger discussion:

• What are SMSF trustees and their advisers experiencing and wondering?
  


• Do you have any information from the regulators that you can "share with the group"?
  


• How are the banks going with instalment warrants? … An accountant who uses Cleardocs asked us for an instalment warrant contact at a bank — he said dealing with his client's bank on instalment warrants was like being in a "vortex".
  

Also, what do you think about these thoughts?

1. Some banks want personal guarantees (though they are calling them indemnities) from SMSF trustee(s) (or members) … which could be seen to be somewhat counter to the 'limited recourse' nature of the loan.
   


2. What the ATO's views will be about instalment warrant arrangements, generally — and in particular, the implications of the requirement that the loan be 'commercial'. Also, if SMSF trustee(s) of a fund with members who are all in their 50s borrow to buy property over 30 years, then are they really doing so to fund their retirement? Some banks are allowing 30 year loans. How might the ATO respond to that?
   


3. The best sort of structures for instalment warrant arrangements:
   

• Who should be the trustee(s) of the Custodian Trust (also known as a 'Bare Trust')?
  


• Who should be the lender?
  


• Are SMSF trustee(s) put-off by the thought of extra entities? Or do they like to be able to see who owns what — rather than trying to think of themselves as 'in the capacity of this' and 'in the capacity of that'?
  

It's early days for SMSF borrowing and instalment warrant arrangements. Some things are becoming clearer, some issues are emerging.

We look forward to the discussion. Feel free to comment in the box below, or to email us at support@cleardocs.com

Instalment warrant arrangements article with interactive graphic overview

Other topics? Feel free to suggest other topics on which you'd like the Cleardocs community to blog.