A typical borrowing by an SMSF has the following steps and the order of these steps is important to minimise any difficulties in completing the transaction.
These difficulties can include:
- Getting the loan settled correctly and on time
- Transferring the property to the SMSF tax free when loan paid out or selling property tax free when in retirement.
The steps are as follows:
- Determine (often with the help of the fund’s accountant or financial planner) that borrowing would be an appropriate strategy to leverage investment
- Check the SMSF trust deed to ensure trustee has power to borrow, grant security and allow assets to be held by custodians/nominees for the trustee (if not, amend the trust deed)
- Check the SMSF investment strategy to ensure it allows for the acquisition of the investment asset and permits borrowing for that purpose (if not, amend the investment strategy)
- Source the asset for purchase, negotiate the price and reach agreement with the vendor
- Finalise borrowing arrangements with the lender including in-principle loan approval
- Determine who is to be the custodian – if a new company, purchase the new company
- Custodian resolves in writing to act as custodian for the super fund trustee in the purchase of the asset
- SMSF trustee resolves in writing to purchase the asset and to appoint the custodian to act for the super fund trustee as bare trustee of the bare trust
- Sign the bare trust deed (Qld, SA, NT)
- Signing of the purchase contract by the custodian (note: not SMSF trustee)
- SMSF trustee provides all the deposit money for the purchase (should come directly from the super fund’s account) – if the deposit initially comes from the pocket of the SMSF trustee, then this deposit amount should be paid into the SMSF as a superannuation contribution within several weeks and notation made to that effect in the SMSF’s records
- Custodian and SMSF trustee sign the bare trust deed (NSW, ACT, VIC, TAS, WA)
- SMSF trustee signs all loan documents with the lender (note: SMSF trustee is the borrower)
- Purchase of the asset is completed using only money coming from the SMSF’s account or from the loan by the lender
- The bare trust deed is submitted to the NSW Office of State Revenue for payment of stamp duty of $50 (plus $10 for each copy)
- When the loan is eventually repaid the asset can be transferred from the custodian to the super fund trustee for nominal stamp duty provided the bare trust deed has been stamped already.
3 August 2012