All Topics / Finance / SMSF Structure

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  • Profile photo of PaulliePaullie
    Member
    @paullie
    Join Date: 2009
    Post Count: 217

    We have just set up SMSF, 4 fmaily members.

    We have a Company SMSF with a Bare Trust.

    We will be setting up a second company to act as the custodian for investing.

    One reason I want the company there is for protection but also so any borrowings do not affect my future borrowing capacity outside of the fund.

    Is this a typical structure?

    Profile photo of PaulliePaullie
    Member
    @paullie
    Join Date: 2009
    Post Count: 217

    Found this good informaiton online:

    1. What name needs to go on the contract?

    This seemingly simple question is probably the most important when utilising your super to purchase property. Unfortunately this is the area that property investors (and their advisers!) seem to get wrong.

    The name on the contract for the purchase of a property when a SMSF loan is used needs to be the trustee of the custodian trust (holding trust / bare trust). The trustee should be a company, for example:

    Smith Custodian Pty Ltd [A.C.N. 123 456 789]

    Although individual trustees can be used, for example John Smith and Jane Smith, a separate company has the following advantages:

    • The majority of banks and lenders who have SMSF loan products require a company as trustee of your custodian trust
    • Property registered in the name of the company will be legally separate from those held in the personal names of the members of the SMSF
    • A separate “two-dollar” trustee company adds another layer of legal protection (which is important as shown by this article)
    • The same company can be used as trustee of multiple custodian trusts

    The following names should NOT be put on the contract when your SMSF purchases property utilising borrowings:

    • The name of the SMSF
    • The trustee(s) of the SMSF
    • The members of the SMSF
    • Any of the above with “or nominee”*

    *Although it may still be legally binding in some states where “or nominee” is used on a contract to purchase property, it is not in others (such as Queensland). In addition I have experienced the problems it can create when the banks legal department / solicitors review the documentation.

    If you sign a purchase contract for a property with the intention of it being held by your SMSF using borrowings, and you don’t have the correct name on the contract, you will need to go back to the vendor and arrange for an entirely NEW CONTRACT to be completed with the correct name. This of course is not ideal and you may lose any leverage you have gained in the negotiation of the price and terms of the original contract.

     

    http://www.buypropertywithsuper.net.au/2011/01/5-common-questions-about-buying-property-with-super/

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Very true Paulie

    We see mistakes made every day of the week and even more importantly advice given by Bankers in regards to the name on the Contract. The Security Trustee also need to show the property details so often the Bare Trust is formed based on the fact the buyer believes the seller will accept his offer and then funds it does not proceed and the Bare Trust has to be amended. 

    The Bare Trust should not be formed until the property has been sourced and offer accepted.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    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.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hi Paulie,

    While you can have either individaul trustees or a corporate trustee for the SMSF, you would always have a corporate trsutee for the security or bare trust. As mentioned, you would normally only form the bare trust once you are 'ready to go' with the loan and property, and one other trap to beware of is that the SMSF has to pay the actual deposit on the property…..you can't pay it yourslef and 'reimburese' back from the fund later.

    Cheers

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    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
     

    Profile photo of PaulliePaullie
    Member
    @paullie
    Join Date: 2009
    Post Count: 217

    Thanks for the replies.

    I agree Anthony, we will have everything setup with all rollovers complete before persuing any deals.

    Assuming my family name is "Paullie".

    We have:

    PAULLIE (SMSF) HOLDINGS Pty Ltd, setup for the fund.

    Superannuation Trust Deed, THE PAULLIE FAMILY SUPERANNUATION FUND.

    We will then have PAULLIE CUSTODIAN Pty Ltd , setup as the custodian in the deal/s.

    I am currently waiting on the ABN for the fund company to open the bank account/s.

    From the above information any offers need to be from PAULLIE CUSTODIAN Pty Ltd. This is correct yes?

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    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

    Profile photo of MikeFMikeF
    Participant
    @mikef
    Join Date: 2008
    Post Count: 60
    Paullie wrote:
    From the above information any offers need to be from PAULLIE CUSTODIAN Pty Ltd. This is correct yes?

    Yes, correct

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    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

    Profile photo of MikeFMikeF
    Participant
    @mikef
    Join Date: 2008
    Post Count: 60
    Anthony K wrote:
    Hi Paullie & Mike
    . It's not wise to exchange contracts until the SMSF has a Letter of Offer for the loan.
    Anthony K

    Totally agree…….wasn't suggesting anything else. SMSF lenders are generally very slow to process/approve and as such I always recommend to my clients to obatin an approval before signing anything.

    Profile photo of PaulliePaullie
    Member
    @paullie
    Join Date: 2009
    Post Count: 217

    I understand Anthony, thanks.

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