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SMSF Bare Trust Package - Bank Loan
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PRODUCT INFORMATION

THE TOPDOCS SMSF BORROWING SOLUTION

Topdocs is one of Australia's most experienced providers of self managed super fund (SMSF) borrowing documentation. We have been providing super fund borrowing documentation and guidance since the 2007 legislative amendment broadened a super fund's ability to borrow.

We have been involved in settling hundreds of super fund property transactions, with our documentation guaranteed to be approved by every lender in the market.

download Review the SMSF Bare Trust Package- Bank Loan order checklist download See the list of documents you will receive

STATE REVENUE OFFICE ADVICE NOW INCLUDED

Topdocs Legal Pty Ltd, our associated legal practice, has completed a thorough review of the state revenue office requirements for every state in relation to SMSF Borrowings, and this advice is now provided with every Bare Trust package ordered. This advice covers what name to put on the contract and the correct sequence of dating of the Bare Trust deed and the contract of sale - two key aspects of ensuring the SMSF doesn't pay double stamp duty on the transfer of the property.

MORE THAN DOCUMENTATION - IT'S PEACE OF MIND

Borrowing in a super fund is surrounded with complexity. You need to satisfy the legislative, tax office and lender requirements, as well as meet the stamp duty exemptions for your local state revenue office. Plus you have to ensure you don't get caught out with CGT on the transfer of the property.

At Topdocs we provide more than just SMSF borrowing documentation - we provide peace of mind. Our team of specialists carefully review each borrowing transaction, ensuring the documentation you receive is compliant, not only with the s67A legislation, but with the ATO and lender requirements.

We also examine your SMSF trust deed and company constitutions to ensure they have the legislative and lender required provisions to enter into the borrowing transaction. Following this, our Lawyers at Topdocs Legal review and sign off each and every SMSF borrowing package that we prepare.

GUARANTEED TO BE ACCEPTED BY ANY BANK

Don't risk having your borrowing documentation rejected by the bank. Our SMSF borrowing documentation is the only documentation that is guaranteed to be approved by any lender - giving you peace of mind your SMSF borrowing transaction will go through as planned. You can learn more about our SMSF Borrowing services here.

WHAT IS INCLUDED IN THE SMSF BARE TRUST – BANK LENDER PACKAGE?

  • 2 x copies of the Topdocs bare trust deed, guaranteed to be accepted by any lender
  • 2 sets of resolutions of the SMSF trustee
  • 2 sets of resolutions of the bare trust trustee
  • Individual legal review and sign off on your documentation by a specialist lawyer
  • Legal advice in relation to the appropriate name to put on the contract, and when to sign the bare trust
  • A thorough review of your transaction by an experienced consultant to ensure your transaction meets the ATO, legislative and lender requirements
  • Free access to expert legal advice and support
  • Free review of your existing SMSF trust deed and company constitutions to determine if they have the appropriate provisions to enter into the borrowing

MORE INFORMATION

You can learn more about the Topdocs SMSF Bare Trust Package - Bank Loans in the RELATED INFORMATION tab.

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.

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adviser pricing ^ Adviser pricing is available to accountants, financial planners, SMSF specialists and Lawyers. This pricing will be automatically applied to your document orders when you join Topdocs and sign into the Topdocs Document Portal.

 

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  • your documents are professionally printed and bound, reviewed by our legal team where required, then delivered to you by express post.

 

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.

RELATED INFORMATION

MORE INFORMATION

Outlined below is additional information relating to the document you have chosen.

What documentation do I need to facilitate a super fund borrowing? ... [more]

At the most basic level, you will need to have a bare trust Trust prepared. The bare trust is the document that outlines the terms of the borrowing process, and is required by the superfund's auditor and the bank lender. Well drafted bare trusts deal with and mitigate the possible CGT and stamp duty issues associated with superfund borrowing.

Apart from the bare trust, you may also need the following documents prepared or updated:

  • New SMSF Establishment or Deed update - The deed for the superfund must contain detailed borrowing provisions, and most pre-2007 deeds will need to be updated. These provisions are required by the auditor and the lender if the lender is a bank.
  • SMSF or Bare Trust Trustee Company Registration - The trustee of the SMSF and the trustee of the bare trust cannot be the same legal entity. Many banks require the trustee of the SMSF and the trustee of the bare trust to be companies, however this is not a legal requirement.
  • SMSF Investment Strategy - The superfund's investment strategy may need to be updated to provide for the borrowing and the increase in holdings in property by the SMSF.
  • Related Party Loan Agreement - if the lender is not a bank, the Fund will need a limited recourse loan agreement prepared.
download Download Documents required to complete an SMSF borrowing article

 

Topdocs SMSF bare trust documentation ...[more]

Topdocs prepares both bank lender and related party lender bare trust documentation. For related party transactions, we provide a Limited Recourse Loan Agreement for your client to utilise.

Key features of our bare trust documentation include:

  • We guarantee our documents will be accepted by every bank in the market place
  • Our bare trust has been refined to ensure it places your client in the best possible CGT and stamp duty position
  • Each bare trust is provided with individual legal sign off, stating the bare trust complies with the SIS legislation
  • We examine each SMSF borrowing transaction on its own merits, to identify any potential related party issues, or general borrowing restrictions.

Other required documentation:

Besides the required bare trust documentation, Topdocs also provides a complete suite of associated documents that your clients will need to facilitate a superfund borrowing, including:

  • Limited Recourse Loan Agreements
  • SMSF Establishments and Superfund Trust Deed updates
  • SMSF Trustee Company registrations
  • Bare Trustee Company Registrations
  • SMSF Investment Strategies with clauses allowing for SMSF borrowing
  • Limited Statement of Advice - some lenders require this.

Who are the parties to an SMSF borrowing arrangement? ... [more]

An SMSF borrowing arrangement has 4 parties - the lender advancing the money to the SMSF, the super fund itself, the vendor selling the property to the SMSF and the bare trustee (otherwise known as the Custodian Trustee) who will hold the property on trust for the SMSF. The role of each of these parties is outlined below:

SMSF Borrowing process

Who can lend money to the SMSF? ... [more]

Both related parties and unrelated parties can lend money to the SMSF to facilitate a SMSF borrowing arrangement. Topdocs can provide you with contact details for each of the major banks lending on SMSF borrowing arrangements, as well as finance broker contact details if required.

Note if a related party is making the loan to the SMSF, the loan must be made on commercial terms. In particular, the SMSF Trustee must be able to demonstrate that the SMSF is not paying in excess of an arm's length rate of interest to the related party. Similarly, a rate of interest that was less than commercial being paid to the related lender would also contravene the Superannuation Industry (Supervision) Act 1993 (SIS Act)legislation.

The ATO, (Tax Office Qs and As) states that the calculation of a rate that represents an arm's length rate of interest needs to be based on 'reasonably objective and supportive data' such as rates charged by arm's length financial institutions for a similar borrowing.

Who may provide advice about establishing an SMSF borrowing arrangement? ... [more]

The Government has released for comment proposed Regulations under the Corporations Law to provide SMSFs access to consumer protection mechanisms, product disclosure statements and statements of advice. The proposed change will require that those providing advice on, or 'issuing', SMSF borrowing arrangements must have an Australian Financial Services Licence. An 'issuer' is defined as each party to the arrangement, including any person who enters into a legal relationship that sets up the arrangement.

The final Regulations, once passed, will come into force 3 months after they are registered, to allow a 'settling in' period.

What type of assets can an SMSF purchase via an SMSF borrowing arrangement? ... [more]

An SMSF can purchase any asset that it would otherwise be able to purchase under the SIS legislation and regulations, if using SMSF money.

What are the limitations in acquiring real property via an SMSF borrowing arrangement? ... [more]

The following general limitations apply when acquiring property via an SMSF borrowing arrangement:

Commercial Property – if purchased from a related party vendor, the terms of the sale must be commercial, that is, the terms of the sale should be comparable to terms that would occur if the vendor was unrelated to the Fund and should not favour the vendor or the SMSF. Also, if acquiring the property from a related party, the property must satisfy the definition of 'Business real property' as defined by the SIS Act. Generally, this would require the Fund Trustee to have an independent valuation of the property prepared.

Commercial property may be leased to a related party of the Fund, as long as the terms of the lease are commercial.

Residential property (including off the Plan) – cannot be purchased from a related party of the Fund in any circumstances and may not be leased to a related party of the Fund in any circumstances.

The following specific limitations also apply to acquiring real Property via a SMSF borrowing arrangement:

Single Titles

The property being purchased via a single borrowing arrangement must be classified as a single acquirable asset. The Tax Office Q and As state that the acquisition of real property on separate titles is not a permissible acquisition under a single borrowing arrangement, except in limited circumstances.

Generally, this means that in order for a single borrowing arrangement to be facilitated, the property must consist of a single title. However, in SMSFR 2012/1, the ATO relaxes the position to some degree by suggesting that, in certain instances, properties over multiple titles may be considered to be a single acquirable asset. Examples of those instances, provided in the Ruling, include:

  • an apartment with a car park on a separate title, where the Laws of the State do not permit them to be separately disposed of;
  • a factory complex on more than one title; and
  • a farm with a large shed constructed over multiple titles, where the shed is of significant value compared to the total asset.

Multiple titled properties may still be acquired under a series of SMSF borrowing arrangements, if each title is held under a separate bare trust. However, careful consideration must be made in these circumstances, as each separate bare trust must then have a separate loan, and a separate charge over the property being held in each bare trust.

House and land packages

It is important to note that house and land packages must be acquired via a single contract, with settlement occurring once construction and, if necessary, strata titling, has been completed. This means that the SMSF cannot execute a contract of sale for the land, then execute a separate contract for the construction of the house on that land. SMSFR 2012/1 indicates that both the deposit to secure the contract, and the payment at settlement, could be completed using borrowed funds under a SMSF borrowing arrangement.

Building on exiting vacant land owned by the Super Fund

Both the Tax Office Q and As and SMSFR 2012/1 state that a SMSF cannot borrow to build a house on vacant land owned by the SMSF.

Adding to an existing property being acquired under a SMSF borrowing arrangement

In SMSFR 2012/1, the ATO provides an example of the addition of a 'Granny Flat' to a property with an existing residence, subject to a SMSF borrowing arrangement. This may be done, on the basis that the property will remain residential, but must not be done using borrowed money. In other words, SMSF funds may be used.

Can capital improvements and associated expenses be included in the SMSF borrowing arrangement? ... [more]

The 2010 Legislationclarifies that money under an SMSF borrowing arrangement applied for the acquisition of an asset can be used for expenses incurred in maintaining or repairing the asset, to ensure that its functional value is not diminished. However, that money cannot be used to improve the asset, as this would, according to the Explanatory Memorandum to the Superannuation Industry (Supervision) Amendment Bill 2010 (Explanatory Memorandum), fundamentally change the nature of the asset used as security by the lender, potentially increasing the risk to the SMSF. Hence, a borrowing cannot, under the current Law, be used to construct a building on land or to renovate, other than to make repairs which do no more than ensure that the functional value of the property is not diminished.

In practice this means that the loan can be drawn down to cover the cost of maintaining and repairing the asst as described above, but not improving it.

Associated expenses that are considered to be intrinsically linked to the purchase of the acquirable asset can, under the 2010 Legislation, also be included as part of the borrowing. The examples provided in the 2010 Legislation (i.e. conveyancing fees, stamp duty, brokerage or loan establishment costs) are specifically allowed as part of the borrowing arrangement.

SMSFR 2012/1 provides further guidance in an attempt to distinguish between what actions may constitute 'repairs and/or maintenance' and what is considered to be 'improvements', and refers to whether the work would fundamentally change the character of the asset. The Ruling provides a number of examples of amendments to an asset and the line between repairs or maintenance and improvement.

The Ruling also clarifies the position regarding the use of non-borrowed money to improve an asset under a borrowing arrangement. The indication is that SMSF funds may be used to improve an asset. However, the range of improvements is limited to an extent, as they must not result in the state or function of the asset being significantly altered for the better. If so, the asset is likely to become a 'replacement asset'.

What are the limitations of acquiring listed securities, units and commodities via a SMSF borrowing arrangement? ... [more]

The 2010 legislation states that the asset being acquired via the borrowing must be a single acquirable asset or collection of identical assets that have the same market value (e.g. a collection of ordinary shares in a single company).

In practice, this means that shares may be acquired via a SMSF borrowing arrangement, but only if those shares are of the same market value, in the same company.

Examples of collections of identical assets that are allowed under the 2010 Legislation (as specified by the Explanatory Memorandum) include:

  • shares of the same type (eg ordinary shares) in a single company;
  • units in a unit trust that have the same fixed rights attached to them; and
  • economically equal and identical commodities, eg gold bars, irrespective of whether they might, for example, have different serial numbers.

Examples of collections that are not allowed under the 2010 Legislation (as specified by the Explanatory Memorandum) include:

  • shares in a single company that have different rights, eg ordinary and preference shares;
  • units in a unit trust of different classes that have different rights attached to them or are potentially subject to differing trustee discretion; and
  • shares in different entities.

Further, to ensure that an acquirable asset is always interpreted in the singular, the words 'collection' and 'identical' should be interpreted as ensuring that an acquirable asset is one or more things that within the arrangement are seen and treated as a whole, eg a collection of shares must be acquired and disposed of as a collection and cannot, for example, be sold down over time.

The definition of 'acquirable asset' excludes SMSF borrowing arrangements that involve money as an asset (i.e. Australian currency or currency from any other country). This addresses concerns with SMSF borrowing arrangement over multiple assets that are traded for money and managed in a similar fashion to margin accounts.

Can an asset in an SMSF borrowing arrangement be replaced by another asset? ... [more]

The 2010 Legislation only allows you to replace the original asset in certain circumstances.

The asset held on trust under the borrowing arrangement can only be replaced by another asset in very limited circumstances listed in the amended SIS Act or its regulations, including:

  • where instalment receipts are replaced with shares in a company; or
  • shares in a company or units in a unit trust are replaced as a result of a takeover, merger, demerger, restructure or trustee action or under a scheme of arrangement.

Significantly, real estate is not mentioned, which means that an SMSF trustee cannot replace one property with another.

The Explanatory Memorandum makes it clear that certain circumstances which might have been thought to bring about the replacement of assets within the meaning of the pre-7 July 2010 Law are excluded, such as:

  • the buying and selling of shares only as a consequence of implementing an investment strategy;
  • the replacement of an asset arising from an insurance claim covering the loss of the original asset;
  • the replacement of a title over real property upon subdivision; and
  • the replacement of a title over real property as a result of Government action such as the resumption of all or part of the property or re-zoning.

What is the procedure to commence an SMSF borrowing arrangement? ... [more]

In order to ensure your fund complies with the SIS legislation and the ATOs interpretation of it, it is important to set up your SMSF borrowing arrangement correctly. Topdocs suggests the following steps when commencing a SMSF borrowing arrangement:

Step 1 - Find the Property the SMSF wishes to purchase

Step 2- Obtain pre-approval of the Loan

Some clients may however enter into contracts before pre-approval of the Loan is made. Clients should consider Step 5 at this point if they are signing the contract before pre-approval of the loan.

Step 3 - Determine who will act as Trustee of the bare trust.

The vehicle that holds the property on trust for the SMSF is called a 'bare trust' (sometimes known as a 'Custodian Trust' or 'Security Trust'). The bare trust must have a Trustee, and it is the bare trustee that holds title to the property. Our opinion is that the Trustee of the bare trust should be a separate legal entity from the Trustee of the SMSF. Topdocs recommends you use a Company to act as Trustee of the bare trust.

Step 4 - Have the required documentation completed for the SMSF to commence the borrowing.

This documentation is required for the fund to comply with the SIS Legislation and the ATO requirements, and includes:

  1. The bare trust.
  2. Establishing a company to act as Trustee of the bare trust (if required).
  3. Updating the Super fund Trust Deed (if required).
  4. Updating the fund's Investment Strategy (if required).

Step 5 - Sign the contract in the name of the bare trustee (or as required by your Revenue Office)

NOTE: the contract of sale can be signed before pre-approval of the Loan, however it is preferable for the contract to be signed after the bare trustee has been determined (or if a Company, established) so the bare trustee can be noted on the contract. Serious Stamp Duty implications can arise if the contract of sale is not properly completed - see 'Who signs the contract of sale' below for further details.

Step 6 - Settle the property with the bare trustee as the title holder.

Who signs the contract of sale of the property? ... [more]

The Trustee of the bare trust is the entity that holds the legal title to the property on trust for the SMSF. Therefore, it is the bare trustee that should be noted as the purchaser of the property on the contract of sale, NEITHER the SMSF NOR the SMSF Trustee. Each State or Territory has different requirements regarding the manner in which the bare trustee is noted on the contract. In some jurisdictions, the name of the bare trustee alone is sufficient, whereas others require a greater amount of detail (for example, the name of the bare trust and the SMSF). As a 'belts and braces' approach to the contract, we recommend the purchaser on the contract be noted in the following manner:

[bare trustee Name] ATF [SMSF Trustee Name] ATF [SMSF Name]

As a result we recommend you speak with your relevant Revenue Office or a property Law expert to confirm how the purchaser name should be noted on the contract, as this may affect the stamp duty implications of the transaction.

What about double stamp duty? ... [more]

As long as the name of the purchaser on the contract of sale is correctly noted (see point above), the bare trust Deed you are using is correctly prepared, and the timing of the sequence of events is correct, there should not be stamp duty applicable when the bare trustee subsequently transfers title to the SMSF. You should speak to your relevant Revenue Office to confirm how best to sign the contract of sale as discussed above.

What about capital gains tax (CGT)? ... [more]

Both the Tax Office and the legislators have expressed concern that the current state of the Law may impose Capital Gains Tax obligations on the SMSF at the time of the transfer of property from the bare trust. There has been talk that the legislators are looking to address this concern, and it should be noted that a properly drafted bare trust Deed can minimise the risk of Capital Gains Tax being payable at the time of transfer of the property from the bare trust to the SMSF. Topdocs has taken great care to ensure that our bare trust documentation takes into account the potential CGT implications of this transfer.

What about personal guarantees? ... [more]

Most banks will require guarantees to be signed by parties other than the SMSF Trustee in relation to the loan. The Tax Office Q and As state that it is acceptable for guarantees to be signed in relation to a SMSF borrowing arrangement as long as the rights to recourse of the lender and the guarantors against the SMSF are limited to the asset that is being acquired.

Can an SMSF borrowing arrangement be refinanced? ... [more]

Yes. The 2010 Legislation clarifies that a SMSF Trustee can, indeed, refinance an existing limited recourse borrowing. According to the Explanatory Memorandum, refinancing may allow the SMSF Trustee to minimise the risk of default on a borrowing resulting from a temporary inability to make a repayment, e.g. a SMSF facing solvency issues due to benefit payment obligations.

An arrangement entered into on or after 7 July 2010, that is a refinancing of a borrowing arrangement entered into before, on or after that date, will be subject to the 2010 Legislation.

A renegotiation of a borrowing with the same lender that is simply a variation of a loan contract that continues to exist will not be subject to the amended Law. However, where the renegotiation amounts to a rescission or replacement of the original contract, this is to be regarded as a refinancing and, therefore, the 2010 Legislation will apply to the arrangement.

Refinancing is not the only way that a new arrangement may arise to which the current Law will apply. A change to the terms and conditions of an arrangement that fundamentally alters the character of the arrangement may result in a new arrangement to which the 2010 Legislation applies.

Which entity registers for GST? ... [more]

As the SMSF holds the beneficial interest in the property at all times, receives the income generated from the asset and is liable for expenses relating to the asset, it is the SMSF, and not the bare trust, that is required to register for GST (where applicable).

Can the bare trust have a bank account? ... [more]

The Tax Office Q and As provide that the bare trust may have a cash account that does not form part of the asset being acquired. The function of this account would be to deal with income and expenses generated from the bare trustee's holding of the asset. It should be noted however that the SMSF is always liable for the expenses resulting from the holding of the asset, and always eligible for the income generated from the asset. According to the Tax Office Q and As, it would not be acceptable for this cash account to operate as a trading account for investment purposes.

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.