SMSF BORROWING & Real estate

SMSF BORROWING & Real estate David Busoli Head of Education Manager QLD

DISCLAIMER Don’t do this at home. The material shown in this presentation has been prepared by Cavendish Superannuation Pty Ltd Technical Services Team and is for general information and practical guidance purposes only. It is not intended to be, nor should it be read as specific personal product or superannuation advice. Whilst all care is taken in the preparation of this material no warranty is given with respect to the information provided, and accordingly no responsibility for errors or omissions, including responsibility to any person by reason of negligence is accepted by Cavendish Superannuation Pty Ltd or any employee of Cavendish Superannuation Pty Ltd. Before acting on any of the information contained in this presentation you should obtain advice from a specialist superannuation or tax professional, whichever is appropriate to your specific needs, objectives and financial situation.

Direct property STRATEGy matters What do you need the Fund to be able to do to meet your property objectives? • Purchase for cash • Borrow • Develop • Joint Venture or Tenants in Common • Acquire property from yourself

Related Parties You includes related parties of a superannuation fund: • Fund members • A standard employer sponsor of the fund or • An associate of either a member or standard employer sponsor of the fund. • Associates

Related Parties An ‘associate’ is: • any other member of the fund • a relative of the member • any trustee of the fund • any director of the trustee company • a partner in partnership with a member • any spouse or child of that partner • any entity controlled by any of the above

Related Parties A ‘relative’ of a member is: • a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that individual or of their spouse • the spouse of that individual or of any other individual listed above. Note: Cousin is not included in the list.

Related PartyAcquisitions You can only acquire from yourself • Business real property - NOT Vacant Land or Residential property even if it is for investment or zoned commercial • The Fund can acquire any type of real property from a non-related party • Once a property is acquired it cannot be leased by a member or related party unless it’s business real property

LIMITED RECOURSE BorrowingS • used to acquire a new asset (can’t finance existing assets) • Only business real property from yourself or related parties • the asset is held on trust (not directly by the Fund) even though the Fund is the borrower • Buy the property in the correct name • the Fund will acquire title to the asset when it’s paid off • the lender can only sell up the Fund asset that has been acquired if there is a default though the lender may also take personal guarantees or security over non-Fund assets • a licensed financial planner must sign off on the suitability of the arrangement (not yet legislated)

LIMITED RECOURSE BorrowingS • Only a single property can be held per Limited Recourse Borrowing arrangement • Borrowing can include expenses incurred in connection with the borrowing, acquisition, maintenance or repair of the asset and accrued interest but not improvements • Construction & off the plan purchases are a problem • Improvements cannot occur even if borrowed monies are not used as this is regarded as a replacement asset • Refinancing is allowable • Problem if using bank’s custodial trust • Assets can’t be replaced (limited exceptions but not for property)

The Structure SMSF has immediate beneficial interest Repayments Bank, Member, etc SMSF $200k + $300k $300k Loan is to the SMSF to buy the NEW security asset ONLY Expenses Purchase is by the Nominee Trustee Pays for property $500k Nominee Trustee Holds Title Apart from trustee Property no other SMSF assets exposed to lender Income Acquirable Asset $500k Personal guarantees and review conditions may be applicable

Limited recourse borrowings Variation – 2nd Mortgage Member $100K Loan – 2nd Mortgage SMSF $100K $200K Loan – 1st Mortgage Bank Trustee of Holding Trust Purchase Property $400K

Limited recourse borrowings Variation – Back to Back Loans SMSF $100K $300K Loan Limited Recourse Loan Member $300K House Loan Trustee of Holding Trust Bank Purchase Property $400K

Limited recourse borrowings Variation - Custodial Arrangement SMSF $100K Bank $300K Loan Limited Recourse Loan Trustee of Holding Trust Purchase Property $400K

LRB process Property 1

LRB process 35 days Property Set Up SMSF with ABN 1 2 Rollover &/or Contribute Sign Contract

LRB process 35 days Property Set Up SMSF with ABN 1 2 30 days Rollover &/or Contribute 3

LRB process 35 days Property Set Up SMSF with ABN 1 2 30 days Rollover &/or Contribute 3 5 days 4 Set Up Holding Trust

LRB process 35 days Property Set Up SMSF with ABN Settlement 1 2 30 days Banks Legal Department Rollover &/or Contribute 3 5 days Finance App & Approval 4 Set Up Holding Trust 5 Sign Contract Trustees as Trustees For the XYZ Holding Trust

LRB process 35 days Property Set Up SMSF with ABN Settlement 1 2 30 days Rollover &/or Contribute 3 5 days Finance App & Approval 4 Set Up Holding Trust 6 5 Sign Contract Trustees as Trustees For the XYZ Holding Trust

LRB process 35 days Property Set Up SMSF with ABN 1 2 30 days Banks Legal Department Rollover &/or Contribute 7 3 5 days Finance App & Approval 4 Set Up Holding Trust 6 5 Sign Contract Trustees as Trustees For the XYZ Holding Trust

LRB process 35 days Property Set Up SMSF with ABN Settlement 8 1 2 30 days Banks Legal Department Rollover &/or Contribute 7 3 2 days Finance App & Approval 4 Set Up Holding Trust 6 5 Sign Contract Trustees as Trustees For the XYZ Holding Trust

LRB process most commonly adopted 35 days Property Set Up SMSF with ABN Settlement 8 1 3 30 days Banks Legal Department Rollover &/or Contribute 7 5 5 days Finance App & Approval 4 Set Up Holding Trust 6 2 Sign Contract Trustees as Trustees For the XYZ Holding Trust

Best practicelrb Process 35 days Property Set Up SMSF with ABN Settlement 8 5 2 30 days Banks Legal Department Rollover &/or Contribute 7 3 5 days Finance App & Approval 4 Set Up Holding Trust 1 6 Sign Contract Trustees as Trustees For the XYZ Holding Trust

Best practicelrb Process 35 days Property Set Up SMSF with ABN Settlement 8 5 2 30 days Planners Statement of advice Banks Legal Department Rollover &/or Contribute 7 3 5 days Finance App & Approval 4 Set Up Holding Trust 1 6 Sign Contract Trustees as Trustees For the XYZ Holding Trust

LIMITED RECOURSE BorrowingS • Source of Finance • Set Up Cost & Running Costs • Documentation • Cash Flow (Negative Gearing) • Future contributions • Death • Acquirable assets • No Improvement or Sub-Division • No Joint Ownership or Multiple Titles • Off the Plan Purchases • Personal Guarantees

Analysis of 7 lenders as at July 2011

Analysis of 7 lenders as at July 2011 Most will NOT check the trustees’/directors’ CRAA

Questions David Busoli 0422 282 161 320 Adelaide Street, Brisbane dbusoli@cavendishsuper.com.au www.cavendishsuper.com.au

UNCONTROLLED UNIT TRUST OR COMPANY This is NOT a related entity even though related parties are directors/trustees/equity participants. A related trust or company of a superannuation fund is any trust or company that a member or a standard employer sponsor of the fund controls. Control is if a group has more than 50% of the entity or control by other means such as personal influence or other factors. Unrelated Trusts or Companies are NOT controlled so can do just about anything.

Uncontrolled Unit Trust or Company Group 2 45% Member Pretty much anything that isn’t anti-avoidance including geared investments Invests SMSF 1 Invests SMSF 2 Invests Relative Unit Trust Invests SMSF 3 Group 1 30% Group 3 25%

Questions David Busoli 0422 282 161 320 Adelaide Street, Brisbane dbusoli@cavendishsuper.com.au www.cavendishsuper.com.au

SMSF BORROWING & Real estate