SMSF Structure

I think the stamp duty rules will vary for each state so legal advice should be sought before signing any contract. This should be done for any property purchase but even more so for a SMSF purchase.

Hi Paullie,
You have most of it right.

The Structure.
 your SMSF Trustee must have all 4 members as Directors, this is what the SIS Act requires. However it says nothing about shareholders a critical omission as the company and the Directors have to follow the resolutions of the shareholders. This is a very strange anomaly. It would be normal and best practice for the shareholders to be the same as the members of the fund with each holding the same number and type of shares as to voting rights. This helps to provide equality between the persons involved. Notice I said "helps" not guarantees as it does not stop 3 members ganging up on No. 4 or stop a 2 against 2 deadlock. So you see it does not have to be a $2.00 company at all, the amount of capital subscribed by each could be $1.00 each (times 4) but just as easily can be $5.00 each as there is good reason to have more than a single share issued..
Your SMSF Trustee should be a Special Purpose company with a restrictive (Non Trading) Constitution as this guarantees the minimum ASIC Annual Fee cost will apply.

The Custodian.
Should be formed before the contract is drawn to ensure the name is guaranteed to be available and owned by you before you commit the vendor to prepare a contract. You can reserve a company name for 2 months by lodging a Form 401 with ASIC and paying a $42.00 fee so that you control it till you want it. You can then get the  vendor to ask his solicitor/conveyancer to provide a contract for you and make a formal offer. If you don't have the ability to have a contract drawn the vendor may lose interest in you in favour of some other buyer. Lastly, you can legally enter into a "pre-incorporation" contract including the company name before the company is formed which can them be ratified by a resolution of the company after it is registered. Also the loan application has to have the custodian name included as the legal title holder. For all these reasons it is in my view best to get all your structure complete with a bank account and the necessary ABN and TFc numbers so you are actually ready to do the deal. Remember it will take about a month for the SMSF ABN and TFN to come through and then another 3 – 4 weeks to get your existing funds rolled over so you can pay a deposit. The Custodian will only need an ABN and nothing else as all financial transactions will occur in the SMSF bank account.

The Name on the Purchase Contract
The correct legal and beneficial ownership structure details are these:
"Custodian Name ATF (as trustee for) Bare Trust Name in trust for Trustee Name of SMSF Name" because this traces both aspects of the two parties as trustees.
The Land Titles Office will only ever show the legal title holder, that is the Bare Trust Custodian, but it's important for the security of the SMSF's beneficial interest to show it in full.
Some Solicitors do not agree with this but very few of them have much experience with SMSF as most have learned it since 2007 when SMSF borrowing was legislated. However my company geared many thousands of SMSF from 1992 onwards (after Forli Pty Ltd V the ATO in 1991) using attached Unit Trusts which are still viable if structured in the hands of a competent adviser.  Since 2008 we have had the task of taking on several large law firms and correcting their mistakes over the past 2 to 3 years in circumstances where their predatory anti client activities were very obvious simply because they want to force our clients to use their own in house documents to generate income for themselves.
Also there is no need whatever for Bare Trust documents to be amended as the property details are not included anywhere in the those documents. The SMSF Trustee makes the purchase offer and how they finance it is no business of the vendor, this is strictly in the hands of the SMSF Trustee as they will own all the beneficial interest in the property.

The Way Forward
My advice on these purchases is be better prepared than you would be for simple personal acquisitions. These SMSF loans involve more information, more work and more paper so I suggest that you prepare well and have the structure in place before you make your first purchase offer. Buying in a rush is not beneficial to you and doing business is best done at your pace with no external pressures.

A short note about A4Companies: We have been establishing and advising on SMSF, various trusts and companies for small business and investors since 1978 that is 33 years so there are very few issues for which we do not have or cannot design a solution.

Regards to All.
Anthony
 

Hello again Paullie
There is an old saying on the "Golden Rule" which is "he who has the gold makes the rule".
There is a bit of mystique around this LRBA (Limited Recourse Borrowing Arrangement) but the essential points to understand are these:

The SMSF Trustee is the financier in all transactions, and understanding the effect of this is critical because it creates the SMSF beneficial interest in any asset/s which the bare trust holds on the SMSF's behalf.
There are two separate interests in the asset to be acquired:

1. The beneficial interest, the rights to enjoy, use and obtain benefits from the asset, are linked directly to the financial input which all comes from the SMSF.

2. The legal interest (title) which is held by the Custodian, but for the Trustee of the SMSF not for itself.
t cannot benefit from the asset for itself as it holds it on trust for another.

So because the SMSF is the money provider and the ultimate asset owner it should be the negotiator, the Custodian is merely a passive servant of the SMSF and is directed by the SMSF trustee as to what and when it is requierd to do.

Hope this makes it easier to understand for you.

Anthony K

Hi Paullie & Mike
No, the SMSF Trustee is the boss (it is the only party with money) and negotiates and makes offers the Custodian is the slave and is directed by the SMSF to hold the asset until the debt can be cleared. Before you make any offers you should research your cash flow requirements in the SMSF to ensure that you purchase is financially viable and that the loan you need will meet the lenders criteria and is available to the SMSF. When the vendor has agreed to your offer you can then get the contract drawn with the Custodian as the legal title holder in trust for the SMSF Trustee. As your cash flow has been checked and your finance is under way you can then consider time needed to complete the loan and settle the purchase. It's not wise to exchange contracts until the SMSF has a Letter of Offer for the loan.
Anthony K