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 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.

Self Managed Superannuation – With Greater Control Comes Greater Risk

Danni Kirwan, Marketing Executive

The poor performance of retail super funds since the start of the GFC has seen many investors make the move to Self Managed Superannuation Funds (SMSF’s).

Statistics released by APRA show that as of June this year, there were approximately 410,000 SMSF’s in Australia – an increase of 27,000 on the previous year alone. Over the same period, SMSF assets increased by $2bn while assets in retail super funds dropped by 9% to $306bn.

While many investors make the move to an SMSF to gain greater control over how their money is invested and managed, it is vital that they realise that this also translates into a greater risk to their investment.

Here are some things that you should consider when deciding whether an SMSF is right for you:


Your responsibilities as an SMSF Trustee

First and foremost, as the trustee of an SMSF it’s your responsibility to ensure that the money of the fund is invested appropriately. Being the trustee of an SMSF carries a number of responsibilities – so if your fund has more than one trustee make sure that the others are people that you can trust. A Self Managed Super Fund won’t be able to claim compensation under superannuation law if fraud or theft occurs within the fund.

As a trustee, it’s also your responsibility to ensure that your fund is administered properly. Although Cleardocs offers you a legally sound and cost effective way to establish your fund, there is ongoing work required to ensure that your fund remains compliant in the ATO’s eyes. If your fund is deemed to be non-complying by the ATO, then you could end up losing up to 40% of your superannuation assets. Even if you seek professional advice, as a trustee you are still responsible for any mistakes made in the management of your fund.

If you do decide to get professional assistance in devising your investment strategy, or administering your fund, then make sure that your adviser is licensed to give you investment advice. This requires them to be “RG146 compliant”. RG146 refers to the minimum training requirements put in place by ASIC for anyone who provides financial product advice.


Where to find out more

Although operating your own SMSF can be complex at times, it’s also a great way to maintain control over your own money – and in turn, your retirement. Careful planning and management of your fund will help to ensure that your fund remains compliant – a key factor in this regard is ensuring that you stay abreast of changes in superannuation law.

On the Cleardocs website you will find a wealth of ClearLaw articles written by our lawyers at Maddocks focusing on issues relating to SMSF’s. You can also update your SMSF deed with Cleardocs for just $99 – ensuring your deed complies with the most recent law.

You can also find information and helpful tips for SMSF trustees on ASIC’s “FIDO” website, here.

Beware – early access to super is a SCAM!

Danni Kirwan, Marketing Executive

The ongoing global financial crisis has left many people looking for extra cash, and in some cases as ASIC warns, attempting to gain early access to their superannuation.

Late last week, ASIC released a statement addressing the increase in the number of people trying to gain illegal early access to their super – primarily through scams involving the establishment of SMSF’s. You can read the full statement from ASIC here

While establishing an SMSF will give you greater control over how your funds are invested, there are restrictions in place that govern what you can invest your super in, and when you can draw on your super.

Despite what promoters of illegal schemes may tell you, early access to Superannuation is only granted in very limited circumstances – such as financial hardship or on compassionate grounds. If applying for early access to super fund on the basis of financial hardship for example, you must prove:

• That you have been receiving welfare benefits continuously for 26 weeks, and;
• That you are unable to meet your day to day living expenses.

If that is the case:

• You can only receive up to $10,000.00 in a 12 month period, and;
• The money withdrawn can only be used to cover your day to day living expenses.

ASIC makes it quite clear that in most cases, you won’t be able to access your superannuation until you retire.

Beware!
If you are approached by someone claiming that you can set up an SMSF and use some of the funds to pay off debts or ease you cash flow problems, beware! Withdrawing money from your super before you retire could open you up to significant penalties and back taxes.

As a trustee of an SMSF, you could be fined up to $220,000.00 and face a jail term of up to five years if it can be proven that you knowingly allowed illegal early access to your superannuation funds. Even if you return the money to your SMSF, it will still be taxed at a higher non-complying tax rate.

If you are thinking about establishing an SMSF to give you greater control over how your funds are invested, the chances are you will also being seeing an advisor to help you invest your funds. If an advisor suggests early access to your super, you should call ASIC or the ATO to make sure you won’t make yourself liable to penalties.

Call ASIC
If you believe that you may have started the process to illegally access funds – for example by setting up an SMSF to roll funds into and access some of those funds early – the ATO urges you to call them on 13 10 20 to discuss your situation.

The ASIC website also has examples of early release schemes – including an extensive list of schemes that they have taken action against. You can see it here

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.