Using two lenders and off-the-plan property

SMSF technical expert and columnist for The Australian newspaper
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There are two common ‘grey’ areas that self-managed super funds (SMSF) come up against when looking to borrow and these involve off-the-plan property purchases and borrowing from two different lenders. But the recent release of some Tax Office minutes have clarified a few issues.

SMSFs can borrow under what’s called a Limited Recourse Borrowing Arrangement. These sorts of arrangements are also referred to as Super Gearing, however this name isn’t used as much as it once was.

While LRBAs have been around since July 2007, they are still relatively new and this means new complex issues are emerging all the time.

Many of these problems revolve around property purchases. Such transactions involve an intricate mix of trust law, property legislation (which varies from State to State), super legislation and finally, Federal and specific State tax legislation.

Off-the-plan property purchases

When using an LRBA, a super fund borrows to buy an asset, which is held in a Holding Trust whilst the loan remains unpaid. There are strict rules limiting the ability of an SMSF to ‘replace’ an asset purchased under an LRBA.

Off-the-plan property purchases differ from normal properties because the asset doesn’t physically exist when the contract is initially signed. Therefore, with off the plan purchases there is one description of the asset during the development phase and then another description once it has been completed and has been strata titled.

An obvious concern is the notion that the change in property title between the payment of the initial deposit and settlement might imply that the asset has been ‘replaced’ compared with its original condition.

The recently released minutes of the June 2012 meeting of the National Tax Liaison Group Superannuation Technical Committee have cleared up some of these fears. The Tax Office said that “provided the substance of what is being acquired under the LRBA … has not changed, such a change in the description will not, of itself, result in there being a different asset being held on trust under the LRBA…”

This is a commonsense outcome.

Two lenders

Sometimes a super fund runs into a circumstance where it wants to use two different lenders. For example, the LRBA might involve a third party lender (like a bank) and a related party lender (that is, the super fund borrows from its members, their relatives, or an employer of a member that contribute to the fund). One lender might provide finance for the initial deposit and the other lender might provide money to settle the transaction.

Under the legislative provisions that govern LRBAs, there’s no restriction on the number of borrowings that make up these arrangements. This means that a trustee merely needs to meet all the relevant requirements of the LRBA provisions.

One tricky aspect of having more than one lender is the issue of security. Under the LRBA rules, a lender’s security is limited to the asset bought with the borrowed funds, so other assets in your fund are protected in the event of a default. But in the event of two defaults with two lenders, which lender would take priority in being able to recover their money first? This will come down to the loan documentation.

If these practical issues can be sorted out, then the super laws won’t stand in the way of two lenders being possible.

Other problem areas

Finally, one mistake many trustees make concerns their existing super fund trust deed.

The LRBA lender is the dominant party and the lender’s solicitors might only review the deed just prior to a transaction settlement. This means any changes they want to your trust deed will have to be completed very quickly because it may not be possible to postpone settlement. A simpler approach would be to have your trust deed checked before you enter into an LRBA.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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