All Topics / Finance / Fine Tuning of SMSF borrowing guidelines

Viewing 9 posts - 1 through 9 (of 9 total)
  • Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    As i receive several enquiries each week from forum members concerning SMSF lending i thought it was prudent to post the following recent legislative changes that may affect members.

    May 23 2012 the Australian Taxation Office finalised its rulings on what can be done to a property that is security for self managed superanuation fund borrowings and what expenditure a SMSF can borrow for. Such changes are retrospective from July 7 2010.

    The initial draft ruling of 2011/01 has now become legislation although some of the wording from the draft ruling has been slightly watered down. In essence the legislation looks at 4 key areas.

    1) An asset that is held as security for SMSF borrowings cannot be fundementally changed.
    2) Borrowings cannot be undertaken to improve an asset.
    3) Borrowings cannot be undertaken to repair an asset that isnt the security for the borrowing and of course you cannot mortgage an asset that is already owned by the SMSF.
    4) Each borrowing arrangement must be for an individual asset.

    The draft ruling started that a "repair" can restore the property to its original conditional even though it needed the repair when initial acquired. The subsequent legislation however states that the work to "restore" the asset can only be done to the state it was in when originally purchased. Subsequent wording allows for a SMSF to borrow to undertake repair although it is doubtful any potential lender would agree to additional lending.

    If the asset is a great state of deteriotion at the time of purchase it is likely that potential work could be considered an improvement rather than a repair which certainly put renovators in a precarious position. Due to the penalties incurrent for a non compliant fund it might be worth making application for a ATO ruling before you start work.

    You cannot fundementally change the security property. The final ruling gives more of a detailed list to what the ATO deem as "changing a property" of which you cannot borrow for such changes.
    Allowable changes include:
    1) Add on 2 bedrooms.
    2) Add a shed, garage or outdoor deck area.
    3) Put in a swimming pool.
    4) Put in a granny flat as long as it isnt on a separate Title.

    Of course of any kind of property development, strata titling etc is seen as fundamental change and you certainly cant borrow for this.

    Legislation allowa for you to borrow the deposit on an off the plan property however it is unlikely any lender would advance upfront funds for this in the current climate. House & Land packages are allowed as long as there is no element of construction and Title does not Transfer until the building is complete.

    All in all the legislative changes have caused borrowers more of a minefield and lenders no doubt will react with their normal over cautious approach.

    Several lenders have entered the SMSF space however you would still be suprised the difference between lenders policy in such an area.

    If anyone has any questions i am always happy to answer them.

    Cheers

    Yours in Finance

     

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Thanks Richard.  As usual, great information  ;-)

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Thanks Paul but typical ATO has now opened up more of a can of worms than before.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Indeed, thanks for posting Richard.  This SMSF business is such a growing market, the number of people wanting to be in the know is growing!

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Hi Jac

    You are so right it can be an absolute minefield and lenders interpretation is a whole new ball game.

    Just processing my 4th SMSF deal for August across 3 different lenders and the requirements of each is totally different.

    Also some of the advice i hear the clients receive also makes you scratch your head and make you think will the ATO come thru SMSF in a year or two and put a stop to the lot.A

    Anyway done properly it is good business for a Trustee to see their asset growing slowly over time with someone else's money.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Hi Jac

    You are so right it can be an absolute minefield and lenders interpretation is a whole new ball game.

    Just processing my 4th SMSF deal for August across 3 different lenders and the requirements of each is totally different.

    Also some of the advice i hear the clients receive also makes you scratch your head and make you think will the ATO come thru SMSF in a year or two and put a stop to the lot.A

    Anyway done properly it is good business for a Trustee to see their asset growing slowly over time with someone else's money.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of wilko1wilko1
    Participant
    @wilko1
    Join Date: 2010
    Post Count: 510

    How do the ato treat SMSF buying a property outright in cash and subdividing. ie (corner block). No borrowings at all.

    Is this allowed?

    Or for example

    making a one off contribution of 150,000 (non cons limit 2012/2013), the contribution would come from a LOC against another asset not owned by smsf. total funds in cash then used to buy and subdivide a property whilst renting existing house

    Or

    Taking a LOC (approximately 150k) against another asset not owned by smsf and creating a ungeared unit trust.

    Then making concessional contributions each year to slowly purchase those units off the individual thus repaying the LOC but after tax of 15 % concession. 

    and i guess finally do you have any advice on is it possible to get a limited recourse loan on a property that has been owned outright in a Superfund. Or can this only be done at the time of purchase.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    As long as the Fund is not seen as operating as a business there is no issue in the member making an non deductible contribution and subdividing the property.

    I have done similar inside my SMSF (without the need of an non deductible contribution).

    Also have a few properties i have sold on Vendor Finance increasing the return.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of wilko1wilko1
    Participant
    @wilko1
    Join Date: 2010
    Post Count: 510

    Operating as a business is a bit of grey area isn't it. For example you might subdivide and sell both house and land to move onto something else. When's the point when it stops becoming a realization of a asset and starts becoming a business?.  What if your smsf investment strategy was to do this once every 10 years.

     What did you think about say starting off as units of a unit  trust (ungeared). Using the tax concessions to salary sacrifice into smsf and buying more units of the unit trust. Obviously purchasing the units owned by personal name/trust by the smsf at a time when it maybe didnt hold any assets. 

Viewing 9 posts - 1 through 9 (of 9 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.