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

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.

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.