SMSF Borrowings. ATO Safe Harbour & Mortgages

We prepare SMSF borrowing gearing documents complying with the ATO ‘safe harbour’

SMSF borrowing is common. We provide documents for SMSF borrowing where the:

SMSF borrowing

SMSF borrowing does not need to be within the ATO safe harbour rules. Indeed the safe harbours can often be non-commercial. The Court is also not bound to follow the ATO’s safe harbour rules. Have your accountant & adviser check for commerciality of the related loan.

 

1. Lender is the Bank

2. Lender is a related party

3. existing SMSF loan is being updated

1. Lender is the Bank

SMSF borrowing where an Australian Bank is the lender

For $1,500 you get:

1.   Bare Trust (custody trust)

2.   Trustee Minutes

3.   Deed of Variation of the SMSF Deed allowing Section 67A Superannuation Industry (Supervision) Act 1993 borrowing

4.   Compliance Certificate for the bank. This confirms that your SMSF Deed allows for limited recourse borrowings, signed on law firm letterhead

5.   Law firm due diligence letter explaining what to do next, signed by a partner of our law firm

You need to email us:

–   SMSF Deed

–   All SMSF Variations (if any)

–    Latest financials (to show us the ABN and current Trustee names and addresses)

–    Bank Name, ACN and address

–    Loan Details: maximum amount, expected settlement date and maximum term (in years)

–    Bare Trustee Name (custodian) …………………….. ACN (if company)  ……………… of ……………………….

–    Copy of the Title Deeds or description of the asset being purchased

–    Credit Card: Name of Card: ……………….. Card No: …………………………..Expiry — — / — — Type: M/C or Visa (circle one)

The documents are delivered via return email. Add another $110 to get the documents bound and posted to you.

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2. Lender is a related party

SMSF borrowing Limited recourse where the lender is related

For $2,200 you get:

1.   Bare Trust (custody trust)

2.   Loan Agreement

3.   Trustee Minutes

4.   Deed of Variation of the SMSF Deed allowing Section 67A Superannuation Industry (Supervision) Act 1993 borrowing

5.   Compliance Certificate for your Auditor – to confirm that your SMSF Deed allows for limited recourse borrowings and is compliant with the ATO ‘safe harbour’, signed on law firm letterhead

6.   Law firm due diligence letter explaining what to do next, signed by a partner of our law firm

You need to email us:

–   SMSF Deed

–   All SMSF Variations (if any)

–   Latest financials (to show us the ABN and current Trustee names and addresses)

–   Lender Name(s) and address: …………………………………………………………………………

–   Loan Details: maximum amount, expected settlement date and maximum term (in years): ………………………………………………………………………………………….

–   Bare Trustee Name (custodian) …………………….. ACN (if company)  ……………… of ……………………….

–   Copy of the Title Deeds or description of the asset being purchased

–    Credit Card: Name of Card: ……………….. Card No: …………………………..Expiry — — / — — Type: M/C or Visa (circle one)

The documents are delivered via return email. Add another $110 to get the documents bound and posted to you.

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3. Update existing limited recourse loans

We charge $3,300 per hour to amend pre-existing SMSF borrowing limited recourse arrangements. We provide:

1.   All documents to ensure that the borrowing remains compliant

2.   For related loans, amending the loan and mortgage agreements to comply with the ‘safe harbour’ requirements set out in the ATO Practical Compliance Guidelines 2016/5

3.   A Due Diligence letter signed by a partner of our law firm setting out what we have done and how to sign and use the documents

4.   A Certificate signed by the law firm for the SMSF Auditor confirming that the SMSF is fully compliant

You need to email us:

–   SMSF Deed

–   All SMSF Variations (if any)

–   Latest financials (to show us the ABN and current Trustee names and addresses)

–   Loan Agreement

–   Mortgage Agreement

–   Bare Trust

–   Credit Card: Name of Card: ……………….. Card No: …………………………..Expiry — — / — — Type: M/C or Visa (circle one)

We charge $770 (one hour) to review the documents and contact your lawyer, adviser or accountant to discuss the different strategies to ensure compliance. Where possible, after the first hour, we endeavour to then provide a fixed quote for any further work.

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Mortgages

If required, we provide the SIS complying set of Mortgage documents. The cost is $2,200. Contact us for more information about whether you require this.

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What we don’t provide

We don’t provide:

1.   Sale Agreements from the owner of the asset to the Trustee of the Bare Trust (telephone us for a quote, if required)

2.   Stamping, transfer, settlement and lodging of the Mortgage at the titles office (your lawyer, conveyancer or settlement agent usually attends to this)

3.   Legal advice on the setting up of the entire structure (this is charged on an hourly rate if required by your accountant, lawyers or adviser)

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Frequently Asked Questions about SMSF Borrowing

Q: I thought that an SMSF can’t borrow money?

A: If your SMSF Deed allows, then section 67A, formerly section 67(4A), Superannuation Industry (Supervision) Act 1993 (SISA) permits your SMSF to borrow money via a bare trust. It is a limited recourse loan, so the assets in the SMSF itself are not exposed to the debt. The lender can only lay claim to the asset sitting in the bare trust.

 

Q: What is an ATO ‘safe harbour’?

A: The loan that you give to your SMSF has to be fair. It has to be at ‘arm’s length’. It has to be on similar terms that a bank or stranger would give your SMSF. The ATO does not want you to give a benefit or advantage to your SMSF. For example, charging your SMSF a very low interest to get more money into your Superannuation fund.

It is also worried that your SMSF does not give you any unfair advantage. For example, you charge a very high-interest rate and remove money from your Superannuation fund. Non-arm’s length income (NALI) is bad. To punish you it is taxed at 47%: section 295-550 ITAA 1997.

But what is fair?

Banks lend on different interest rates with different conditions. The ATO wants to help you answer this question. If you act within the ATO’s ‘safe harbour’ then your loan is at arm’s length: ATO IDs 2015/27-28. In 2016, the ATO issued Practical Compliance Guideline PCG 2016/5. It set out the Commissioner’s ‘safe harbours’. The ATO tells you what it thinks is ‘normal’ when your SMSF borrows money from you.  These loans are related-party borrowings. However, the ATO wants you to act as though you were dealing at arm’s length.

If an SMSF loan complies with the Guideline then the ATO states it is arm’s length. Even if it is not at ‘arm’s length’ the ATO still gives you the tick of approval. You then escape the NALI penalty. Dangerously a Practical Compliance Guideline is not binding on the Commissioner. The ATO can change its mind. The Court also usually ignores them. They, therefore, don’t provide certainty.

When the ‘safe harbour’ first came out, the ATO set the lending interest rate at 5.75%. This was for 2015-16. Banks charge different rates for home loans, investment home loans and commercial property. But the ATO just provides the same interest rate for all of them. Quite strange and artificial. The Guideline also requires that:

–   the loan cannot exceed 15 years;

–   a maximum 70% loan-to-value ratio;

–   repayments are monthly;

–   a registered mortgage;

–   personal guarantees are ok, but not mandatory..

What if your SMSF loan does not meet the safe harbour terms? You lose the automatic protection. Your SMSF loan may still be at arm’s length. You just need to prove it.

Q: Who should pay the deposit?

A: The SMSF itself should pay the deposit. Not the bare trust. This avoids double stamp duty. Mistakes mean that a transfer of dutiable property from the bare trustee (custodian) to the SMSF trustee inflicts (stamp) duty.

 

For more legal advice, please have your advsiers, accountant or lawyer telephone us.

Adjunct Professor, Dr Brett Davies,  CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
Mobile:       04777-96959
Direct:       08 6389-0400
National:     1800-14-16-12
Email:     [email protected]
Skype:     brettkennethdavies
Build Documents:     https://www.legalconsolidated.com.au/

 

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