hi accounting gurus…
I have approached someone within my family about a potential money partnership agreement for a buy-reno-sell property investment deal. They are interested, and having worked together before are willing to consider my proposal and lend me the money. Previously the money I borrowed was a smaller amount and came from their personal savings. This time around we’re looking at $100, so she’s considering if she can take the from her SMSF. From what I understand she was considering putting into a term deposit for 6.5% so finds my terms and offer of 10%p.a. more desirable.
Just wondering, what barriers exist to using SMSF money in an investment loan in this way? Instead of putting the money in the bank for a term deposit with interest paid on maturity, it would be loaned to me with interest paid upon settlement. She is approaching her accountant this week to discuss, so she will be seeking specific professional advice, but I’m just interested in any comments or feedback. Is it even possible? Her name or SMSF would not appear on the title.
Thanks,
Emmaso reading the below on the ATO website makes my proposal look somewhat difficult…
Restrictions
Super laws place restrictions on the types of entities your fund can invest in or with, and the entities that your fund can acquire assets from.
Investment restrictions exist because they protect fund members by making sure fund assets are not exposed to undue risks, like a business failing.The investment rules are one of the most important requirements of the super laws. Failure to comply with the rules can result in your fund losing its complying status and you as trustee of the fund being either:
*disqualified
*removed
*prosecuted, which may result in you being fined or imprisoned.Loans or financial help to members or a member’s relative
You can’t lend money or provide direct or indirect financial help (including the provision of credit) from your fund, to a member, or a member’s relative. For example, using fund assets to guarantee a personal loan would contravene this investment restriction.
A member or a member’s relative means any of the following:
*a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that individual or of his or her spouse
*a spouse of that individual or of any individual specified above.Hi
As previous poster says……generally SMSF fund trustees cannot lend to or invest in a related party or related trust of the fund however they can in certain circumstances such as where the loan/investment is no greater than 5% of the market value of the fund's total assets.
You would have to place it in joint names; so the warranty of the SMSF needs to be listed on the sales; but the loan needs to be a SMSF loan as well.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Michael,
Can a SMSF name go straight onto the tite? I recall reading something about SMSF investing in property through options or trusts or something more complex…
Are you suggesting that rather than a straight out "cash" loan direct to me for use on the property, the SMSF could say go on the title as 20% owner and therefore allow funds to be released at settlement?
Thanks,
EmmaYou can buy properties under a SMFS, in term of the name on the title; it be under what we call the smfs’s “warrant” .
They also could be joint buyers with a 3rd party ( however i think there may be some condition regarding 3rd parties who are related, using the one arm rule…something a accountant can confirm) if it’s bought with a 3rd party, then yes the smfs can use their own cash as “deposit” towards the loan.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
This also means the risk type is very different to your original plan….instead of risking and defaulting on $100,000 for example…the smfs is equally responsible for the mortgage repayments etc…
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
wisepearl wrote:Can a SMSF name go straight onto the tite? I recall reading something about SMSF investing in property through options or trusts or something more complex…
Are you suggesting that rather than a straight out "cash" loan direct to me for use on the property, the SMSF could say go on the title as 20% owner and therefore allow funds to be released at settlement?
Thanks,
EmmaAssumming that the in house asset rules (related party) are not being breached then the ownership or percentage thereof could rest with the SMSF. On title would be the name of the SMSF trustee either as a joint tenant or as tenants in common depending on how the ownership is to be structured.
However if the above is the case you can not then mortgage the property for a number of reasons.
1/ A SMSF can not mortgage a property unless it is done properly under the Limited Recourse Borrowing Arrangement (LRBA) whereby a bare trust needs to be established and property "owned" by this entity for the benificial owners of the SMSF and it's members.
2/ The ATO has previously considered joint SMSF investors owning an asset via one bare trust and determined (ATO ID 2010/172) that it was not possible where borrowings are being contemplated.
Whilst purchasing as tenants in common enables the SMSF to take ownership of a fixed percentage of a property, with another party (such as an individual or trust) owning the remaining percentage, the ATO considered that jointly borrowed under a single holding trust breached the law.
The ATO held that the requirement for the asset the SMSF trustee was acquiring to be held on trust and for the SMSF trustee to acquire a beneficial interest in that asset was not met because:
• the asset the trustee of the bare trust held was 'sole title to the residential property; but
• the interest the SMSF trustee acquired was only a partial interest in the property — that is, a joint interest with the other party, each as a tenant in common.
On top of this lenders want nothing to do with JV's and the like when SMSF's are involved.
So if I understand the above properly, then in very simplified terms:
*a SMSF can purchase a property, and could be tenants in common with another party
*however, the other parties on the title should not be related to trustee of SMSF (makes things difficult)
*AND the other parties on the title can not have a mortgage over their share, but needs to be bought outright
*Banks get scared of JVs with SMSFs and lending would be very difficult…So sounds like my possible scenario with the loan is not really acceptable under current SMSF guidelines.
Back to the drawing board
wisepearl wrote:So sounds like my possible scenario with the loan is not really acceptable under current SMSF guidelines.Back to the drawing board
Correct
By the way you can't mortgage a part of a property only a whole property.
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