Borrowing from the Bank

How can I implement a borrowing

In order to implement a borrowing the following are some brief steps to achieve this:

• Do your analysis – to ensure the SMSF is appropriate for your circumstances and analysis that a borrowing is appropriate and achievable for your circumstances. Both analysis should include the sole purpose test and consider the investment strategy.
• Setup a SMSF – obviously miss this step if you already have one but ensure you check the trust deed to make sure it allows you to borrow.
• Arms length basis – ensure all arrangements are be made on a an arms length basis, especially important when the lender is related to the member.
• Setup a new company – “Pty Ltd” to act as trustee, to avoid any legacy issues, contact your Accountant/ Adviser to do this for you.
• Setup a bare trust – The Bare Trust will state the new Company as the Trustee. You can arrange for your Accountant / Adviser to do this, or sometimes its more cost effective to let the bank’s lawyers prepare it depending on the fees the banks lawyers charge to review it.
  • The Time to setup the Holding trust Trust Deed depends on the state you are in. Check again before relying on this, however at the time of writing this must occur before the exchange of contracts in WA, Queensland and South Australia and after the exchange of contracts in NSW, Victoria, Tasmania and the ACT. In WA, the holding trust deed can be signed before the exchange of contracts. 
• Execute the contract to purchase – you should seek advice on the drafting of your contract and advisers may differ in their advice on which step comes first. Ensure the asset contracted to purchase is a <single acquirable asset> and is an asset that is permitted to be acquired by a SMSF, click here for examples.
• Provide the lender (the bank/yourself) documents – to draw up the loan documentation. Where the lender is a related party, be aware of any Div 7 A or UPE issues. <See tips to you being the lender/bank>.
• Execute a limited recourse loan – limited recourse means that in the event of default of the loan conditions, the lender only has recourse against the property in the SMSF, and no other assets of the SMSF. Lenders now often seek guarantees from members in their individual capacities. Ensure you read the loan to make sure it is limited in recourse to the acquirable asset ONLY and if any other securities are obtained by the bank such as a guarantee by members that this guarantee does not extend to assets other than the property of the SMSF. A limited recourse loan can be refinanced by another lender at a later stage if required.
• The SMSF pay the loan repayments – and observe loan conditions.
• The SMSF must not change the single acquirable asset – in respect to the borrowing, The ATO draft ruling <SMSFR2011/D1> explains situations where an asset is considered to have been replaced.
• Termination of Loan – the asset continues to be held on ‘trust’ by the new company until the loan is paid in full. After the loan has been paid in full the property can be vested to the SMSF and the bare Trust wound up. The corporate trustee can be either wound up or used by the directors for some alternate purpose if suitable.

See how a property development may be undertaken whereby the land is changed in circumstances where a <Related Non Geared Unit trust> is created and the units are used as security.  See what the ATO has to say about limited recourse borrowing arrangements – <ATO Link>.

An SMSF cannot borrow to repair an asset it already owns which is not subject to a SMSF Loan.

This is because:

• the money is not used to purchase a single acquirable asset (s67A(1)(a));
• the asset is presumably not held in trust
• anything used in carrying out the repair is not subject to a SMSF Loan in its own right

Read more to understand what constitutes an <improvement or a repair>.