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 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/