Self-Managed Super Fund (SMSF) Property Loans
Q&A
1. General
Q. Why are there limitations to what property types and transaction types that are allowed
under SGB policy for SMSF lending?
A. Section 67(4A) of the SIS Act allows a borrowing if the money is applied for the acquisition or
refinance (purchased after September 2007) of an asset other than one the Trustee is prohibited
by the Act or any other law from acquiring. A SMSF is permitted to gear for the acquisition of
business real property. There are a number of rules in the SIS Act relating to investments, the
manner in which they are made and assets that may or may not be able to be acquired. A breach
of some of these rules merely results in an offence and there may be issues as to whether or not
the agreements entered into are enforceable.
Q. What does “Business real ” Property mean?
A. The ATO draft definition of Business ruling explains our interpretation of the various parts of
the business real property definition and how they fit together.
Business real property as relates to the SIS Act and to an entity is defined as:
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Any freehold or leasehold interest of the entity in real property
Any interest of the entity in Crown land, other than a leasehold interest, being an interest
that is capable of assignment or transfer where the real property is used wholly and
exclusively in one or more businesses (whether carried on by the entity or not). It does
not include any interest held in the capacity of beneficiary or a trust estate.
Some key points from this ruling are:
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SMSFs or the other entity must hold an eligible interest in real property which can be a
freehold or leasehold interest in real property (as owner or lessee) or an assignable or
transferable interest in Crown land that is not an interest held as a beneficiary of a trust
estate
The underlying land must satisfy the business use test, which requires the real property to
be used wholly and exclusively in one or more businesses carried on by any entity.
Q. What is meaning of Security (Property) Custodian?
A. The Security Custodian (or Property Custodian) is an entity that holds the title to a property
being acquired under a gearing arrangement by an SMSF. As a SMSF is unable to execute a
charge (mortgage) causing for risk to assets of the SMSF, the security custodian acts as
holder/mortgagee of property on trust for the SMSF, thus limiting charge and risk the mortgaged
asset and isolating right of access the other assets owned by the SMSF.
Q. What is a SMSF Trust Deed?
A. At a general level the SMSF Trust Deed is a deed that defines the rules, powers and
responsibilities of the SMSF Trustee and includes responsibilities in regards to investment
strategy and investing on behalf of the self managed super fund and its members.
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Q. What is a Trust Arrangement Deed?
A. A trust arrangement deed is a “pre- purchase” deed (agreement) between the SMSF Trustee
and the Company entity acting as “Security Custodian” that details:
 The rules, powers and obligations on each of the parties
 The role of security custodian to hold title to the property on trust for the SMSF and
obligation to transfer title to the SMSF upon full repayment of loan
 The SMSF’s right to income from the property and obligation to meet loan repayments
 Agreement as pertaining to a future acquisition of assets (including property) under a
gearing arrangement. Note: the deed can apply to more than one asset i.e. The SMSF may
seek to enter into multiple gearing arrangements for the acquisition of multiple
properties.
Q. Are SMSF Loans regulated?
Where the SMSF is borrowing for the purpose of investing in a residential property, AND the
SMSF Trustee is an individual the National Credit Code (NCC) applies meaning that a regulated
product must be documented. All other types of lending to an SMSF do not fall under the NCC
and hence an unregulated product can be documented.
2. Dealing with SMSF Loan Enquiries
Q. What information should I gather when assisting a customer with a SMSF Loan enquiry?
A. The key information to assist includes:
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SMSF investment strategy (due diligence of SMSF compliance with SIS Act Section 62
Property type (permitted under SIS Act and SGB policy)
Vendor (related or unrelated party)
Lessee and lease terms (related or unrelated party)
Details of company entity to act as Security (Property) custodian
Confirmation that the SMSF Trust Deed provides the SMSF Trustee with the powers to
borrow
Confirmation that a trust arrangement deed between the SMSF trustee and security
custodian is held or being prepared
Confirmation of SMSF existing investment income, proposed rental income and members
proven or proven available annual contributions.
Q. What does “proven available annual contributions” mean?
A. Self employed parties hold ability to self elect the level of contributions drawn from business
entity each year (subject to Govt imposed minimum requirements) as payment on behalf of the
members of the associated SMSF. Whereby self-employed parties have paid low levels of
contribution historically whilst retaining significant levels of profit in the business entity, there is
capacity to increase contribution amounts to the contribution thresholds/caps as defined by the
ATO.
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Q. What types of Loans are available for SMSF property investments?
There are 3 types of loans available for an SMSF where the SMSF Trustee and the type of
property being purchased (i.e. residential or commercial) is a key factor in determining the most
appropriate loan. They are:
1. Residential Property Investment with ‘Individual’ as Trustee (regulated by National
Credit Code - NCC): Appropriate NCC Regulated Mortgage (Home Loan) Product must be
utilised- refer to Mortgage Products
2. Residential Property Investment with ‘Company’ as Trustee (unregulated): Business
Loan Variable and Business Loan Fixed documented on unregulated SMSF specific offer
letter
3. Commercial Property Investment with ‘Individual’ or ‘Company’ as Trustee
(unregulated): Commercial Loan Variable and Commercial Loan Fixed documented on
unregulated SMSF specific offer letter
Note: All SMSF loan offer documents MUST be prepared / checked by a Panel Solicitor
Q. What are the key differences between standard loan offerings and SMSF loans?
A. The key differences are:
 Loan Amount: minimum $250,000; maximum $5,000,000 (or as approved on an
exception paper)
 Servicing: Specific servicing guidelines must be followed and servicing must be restricted
to SMSF existing and proposed income including member contributions
 LVR:
- LVRs differ according to the property and SMSF Trustee types
- Where an individual(s) is acting as the SMSF Trustee the standard LVR must be
discounted to value of 90% of the Standard residential property LVR;
- Where an individual(s) is acting as the SMSF Trustee the standard LVR must be
discounted to value of 90% of the Standard Commercial property LVR;
- Specialised commercial property LVRs must be discounted to 90% of standard
LVRs on a vacant possession alternate use basis
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Mandatory Security requirement: SMSF Guarantee supported by SMSF Mortgage from
the Security Custodian
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Guarantees (available only for unregulated SMSF Loans):
1. Beneficiary guarantees are mandated where reliance on contributions is required for
servicing assessment. The beneficiary guarantee document and guarantee and indemnity
waiver document must be executed by all beneficiaries of age 18years or older.
2. Unsupported Guarantees from related parties is not mandated and recommendation is to
avoid wherever possible (reliance on income from potential guarantors is NOT permitted)
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Additional Security (available only for unregulated SMSF Loans):
Whilst it is preferential to avoid additional security, additional limited recourse security
may be taken;
- Must use the SMSF Mortgage and Guarantee which include clauses to waive rights
against assets of the SMSF
- Must NOT be taken to provide additional income for servicing (ATO rulings)
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Can be taken where an LVR shortfall exists
Where the property being acquired by the SMSF is part only of a business real
property operated by the related business. E.g. A motel property made up of 2 or
more parcels under separate titles and SMSF seeks to acquire one parcel.
Q. Why is the LVR discounted for Transactions where the SMSF Trustee is an individual?
Clause 28.14 of the Code of Banking Practice (COBP) contains limitations on the enforcement
of judgements against a guarantor where the borrower is an individual. Code of Banking
Practice (COBP) therefore provides - that where an individual(s) acts in the capacity of trustee
for a SMSF the Bank is unable to enforce a judgement against a the guarantor until it has
obtained a judgement against the borrower and has made a written demand on the borrower
for payment of the judgement debt and the debt has not been satisfied for 30 days after the
demand. Normally this would simply delay the Bank's ability to enforce a judgement against
a guarantor but, as a result of the limited recourse provisions required by the SIS Act, the
Bank is not able to obtain or enforce a judgement against the borrower when the trustee is
an individual. This issue only arises where there is a shortfall between the amount
outstanding and the value of property.
As a result of the inability to effect judgment against the SMSF (Trustee) the LVR for lending
to this type of SMSF structure has been discounted at 90% of standard LVR as a risk
management initiative.
Q. What documentation is required for SMSF Loans
All SMSF Loan Offer Documents MUST be prepared by a SMSF specific Panel Solicitor. Two
types of documentation are required for SMSF loans:
1. UNREGULATED SMSF loans: Specific SMSF ‘unregulated’ documentation (SMSF Loan offer,
SMSF Standard T &Cs, SMSF Mortgage and SMSF guarantee) that contains waiver clauses
and specific pre conditions must be used in all cases including the taking of additional
security.
2. REGULATED SMSF Loans (Mortgage Product): Specific SMSF ‘regulated’ documentation
(SMSF Loan offer, SMSF Standard T &Cs, SMSF Mortgage and SMSF guarantee)
Q. Are there any requirements with regards to processing applications?
A. Yes, when processing a SMSF loan application, managers must ensure:
 Pricing is in line with SMSF Lending Pricing Policy located on the Pricing Centre
 Adherence to processing guidelines (published on Product Centre/ PSL)
 A sub panel of solicitors only can be used for preparation of Facility offer documents,
legal documents and attending to settlement
Please refer to the Business Lending Product pages on the Intranet (Business Product Centre
or Product and Services Library “PSL”)
3. Residential Property Investment
Q. Can a SMSF borrow to purchase residential property for investment purposes?
A. Yes, a SMSF can borrow for the acquisition of residential investment property as long as the
residential property is being purchased from an unrelated party. That is, the purchase must be on
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commercial terms from a party whom is not involved with the SMSF as a trustee, member,
beneficiary or related business entity.
Q. What are the implications of the National Credit Code (NCC) for SMSF investment in a
residential property?
A. Where the SMSF has an individual(s) acting in the capacity of SMSF Trustee and the SMSF is
seeking to gear for investment in residential property then NCC will apply. This means that an
SMSF can only borrow using a NCC regulated mortgage product (available to SMSF’s).
Q. When does NCC not apply in the acquisition of a residential investment property?
Where the SMSF Trustee is a company NCC regulations do not apply. This means that a SMSF can
borrow using a Business Loan Variable or Business Loan Fixed for the purpose of investment in
residential property.
Q. What type of residential properties can be acquired using SGB SMSF property loans?
A. A SMSF can borrow for acquisition of residential investment property being:
 Completed residential dwellings (houses) on land up to 2.5Ha (zoned residential)
 Townhouses and Strata title units (up to a maximum of 4 units in a block)
Q. Can a SMSF borrow for investment in/ purchase of a Serviced Apartment?
A. A SMSF can enter into a gearing arrangement for the purchase of a serviced apartment
subject to the following conditions:
 Proposed investment complies with the SMSF’s Investment Strategy and SIS Act
 Prior approval from Credit for each complex is gained
 Maximum bank exposure in any one complex is less than 20%
 SMSF LVR policy is applied
 Floor space is greater than 50 metres squared
 Servicing is assessed using 60% of rental or anticipated rental income based on standard
residential tenancy of at least 6 months
Q. Can a SMSF borrow for the purchase of a land and house package?
A. SGB policy does not allow for finance of land and house packages.
Q. Can a SMSF gear for the purchase residential property from a related party?
A. No, acquisition must be from an unrelated party
Q. Is a lease to a related party acceptable for the purpose of lending to an SMSF seeking to buy
a residential property?
A. No, The tenant must be an unrelated party
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3. Commercial Property Investment
Q. Can an SMSF borrow to purchase commercial property from a related entity (business
operation or member)?
A. Yes, a SMSF can borrow to purchase a commercial property from a related party subject to the
transaction being completed on commercial terms and the purchase price being reflective of the
true market value of the property. Valuations must be completed on a vacant possession basis.
Normally this type of transaction will involve either a business entity or the individual directors/
business owners seeking to on- sell premises from where they operate the business to the SMSF
and then lease back under a commercial lease arrangement. Any hint of acquisitions to relieve
business distress should raise red flags.
Q. Is a lease to a related party acceptable for the purpose of lending to an SMSF seeking to buy
a commercial property?
A. Yes, the SMSF can lease back to a related business entity subject to lease being on commercial
terms and rental being at market rates.
Q. Does the purchase of a commercial property by an SMSF fall under the National Credit Code
(NCC)?
No. All acquisitions of commercial property do not fall under the NCC regulations and therefore
can be documented on unregulated facility offer documents.
Q. Can a SMSF borrow for the acquisition of specialised commercial property?
A. The SIS Act permits SMSFs to gear for the acquisition of property that would normally be able
to be acquired by an SMSF for investment purposes. St George policy allows for the acquisition of
specialised commercial property, under strict conditions of:
 Pre application Discussion Paper/ enquiries to Credit to gain support to be made
 All applications must be assessed by Credit
 The specialised property is acceptable to SGB under standard credit policy
 Valuation of property to be on “property only & vacant possession” basis
 The specialised property is to be leased to an experience operator
 The term of the loan/s should be no greater than the term of the proposed lease
Q. What are the guidelines for funding acquisition of specialised property?
A. Credit & Legal have provided guidance as relates to SMSF purchase of freehold specialised
commercial property as follows:
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Must be a property type normally acceptable under standard credit policy
Business operation from property must be without high level of regulatory monitoring
and compliance (i.e. Purpose built Aged Care facilities are an exclusion)
LVR for specialises property must be discounted to 90% of standard LVR
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Valuations: Must be valued on a freehold basis & vacant possession basis only (excluding
business value including goodwill)
Lease: Must be leased/ to be leased to experienced operator.
SIS Act Compliance:
- If being acquired from a member or a related party or is partly owned by a related
party, then careful consideration must be given to compliance with the legislation.
- As a first step RM should sight a sign-off from the borrower's lawyer(s) and
financial adviser confirming the structure as proposed (detailed in the sign-off)
does satisfy the SIS Act and the investment strategy (appropriateness for given
fund)
Q. What types of specialised properties are confirmed as acceptable investments under the SIS
Act and Credit Guidelines?
A. The following property types are generally acceptable under Credit Policy:
 Hotels are confirmed as acceptable under SIS Act subject to compliance with the
investment strategy covenants in Section 52 of the SIS Act.
 Motels are confirmed as acceptable under SIS Act subject to compliance with the
investment strategy covenants in Section 52 of the SIS Act.
 Rural Property, where the rural property is a real business* property, is confirmed as
acceptable under SIS Act although many conditions need to be considered to ensure
legislative compliance. Further information on rural property requirements is contained
below.
Q. What types of specialised properties are confirmed as generally unacceptable under Group
Credit Guidelines?
A. The following property types are generally unacceptable under Group Credit Policy:
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Service Stations are confirmed as acceptable under SIS Act however Group Credit has
indicated they are not keen to accommodate. Any applicants/ related parties would need
to demonstrate significant experience and strong performance in the operation of service
stations
Aged Care Facilities will not be accommodated under SMSF lending due to high level of
regulation
Properties housing high risk business operations
Properties purpose built for highly regulated businesses/ industries
Q. What are the key items to be addressed where a customer seeks SMSF loan for the
acquisition of rural property?
A. Generally the key items for consideration for enquiries regarding investment in rural property
are:
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Purchases from a related party: If the rural property is being acquired from a related
party to the fund then:
- The fund must have fewer than 5 members;
- It must be acquired at market value;
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The rural property must be business real property of the related party and must be
property as defined in section 66(1) of the SIS Act, that is, a freehold or leasehold
interest in real property; or an interest in Crown land (not being a leasehold) and
which is capable of assignment or transfer; or a prescribed interest in real property,
where the real property is used wholly and exclusively in one or more businesses
and does not include an interest in a trust;
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Purchases from an unrelated party to be leased to related party
If the rural property is subject to a lease (or lease arrangement) from the fund to a related
party of the fund the SIS Act section 7, sub-section 71(1)(g) requires that the fund must
be:
- Fewer than 5 members;
- The lease must be enforceable by legal proceedings between the fund and the
related part;
Throughout the term of the lease the property must be business real property;
- From a general law perspective and to avoid other issues under SIS the terms of
the lease and the rent must be determined at arms length.
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Further SIS Act compliance requirements
- Section 66(6) permits the acquisition of rural property containing dwellings if the
dwelling area is limited to 2 hectares and the predominant use of the property as a
whole is not private or domestic.
- Section 66(6) does not extend to other aspects of the business such as stock,
equipment and items that are not fixtures
- Compliance with the sole purpose test i.e. the acquisition cannot be undertaken
other than for a purpose permitted under section 62 - i.e. to provide retirement
benefits etc.
- The acquisition is consistent with the investment strategy of the fund as required by
section 52(2)(f).
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Further considerations
Careful consideration of the whole structure and identification of the general principles
above are required. Particular advice should be taken in respect of any particular
transaction and written confirmation from the customer’s legal representative/ financial
planner as to compliance with all requirements of the Superannuation Industry
(Supervision) Act 1993 and that in particular the lease to any related party by the fund
meets those requirements.
4. Taking Additional Security
Q. When would the taking of additional security be appropriate?
A. The taking of additional security can be considered when:
 An SMSF seeks to borrow funds greater than LVR permitted for property type being
acquired.
 An SMSF is seeking to purchase a parcel of land forming part of a commercial property
used in entirety for a business operation.
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Note: Additional Security cannot be taken where the SMSF Loan is regulated under the National
Credit Code
Q. Should I take unsupported Guarantees from members/ beneficiaries of the SMSF?
A. Generally, unsupported guarantees should be taken when:
 Servicing Assessment is reliant of Member Contributions to the SMSF
 ATO rulings provide that in the event a beneficiary Guarantee is realised to meet any
shortfall to clear the SMSF loan the repayment by any Beneficiary Guarantor will be
considered an SMSF contribution and therefore a taxable transaction.
 Beneficiaries must be of 18 years of age or older
 Income earned by beneficiaries or related parties cannot be used to support servicing.
Q. Do I need any additional security when relying on member contributions in the servicing
assessment?
A.
Yes, a beneficiary guarantee and guarantee & indemnity waiver document MUST be taken in all
circumstances where the servicing assessment includes reliance on member contributions.
Q. Can I take a supported Guarantee from a SMSF Beneficiary/ Member?
A. Generally, supported guarantees can be taken, if deemed necessary, subject to all Guarantors
obtaining independent financial and legal advice and provided that the Beneficiary has no
recourse to the SMSF and / or Security Custodian in the event of security being realised to clear
any shortfall to repay loan in the event of default.
Q. Should I take unsupported or supported Guarantees from other related entities of the
SMSF?
A. Generally, unsupported guarantees should be taken only when absolutely necessary
 ATO rulings provide that in the event a Guarantee is realised to meet any shortfall to clear
the SMSF loan the repayment by any Guarantor will be considered an SMSF contribution
and therefore a taxable transaction.
 Income from related parties cannot be used to support servicing.
Q. Can the SMSF lodge an existing property (owned by the SMSF) or other assets as additional
security?
A. No, An SMSF cannot provide charge over or access to any of the funds existing assets.
Q. Can I take additional security from related parties (individuals / business entities)?
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A. Yes, additional security can be accepted from related parties. All related parties must provide
evidence of independent financial and legal advice (as in the event of default and security
liquidation the related parties contribution to clear an SMSF debt will cause for imposition of tax
liability and/ or loss). In all circumstances additional security must be limited in recourse and
SMSF mortgage and SMSF Guarantee documents must be used.
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5. SMSF purchase of property shareholding as tenants in common
Q. Can a SMSF borrow to purchase a shareholding in a commercial property and hold
beneficial interest (ownership) as tenants in common with a related party?
A. If the tenant in common ("co-owner") (i.e. with the security custodian) is a related
party of the superannuation fund, then generally the transaction should still be
permitted unless the property is leased to the co-owner. In each case, the SMSF must
borrow as a sole borrower for the acquisition of its shareholding (i.e. SMSF cannot be
joint borrower) and any third-party security should be prudently limited recourse and
the security provider should waive rights of indemnity and contribution. This is a very
broad generalisation and could change depending on the specific circumstances.
Each case still needs to be examined to ensure all other requirements of the SIS laws
are satisfied. In this respect, Group Legal strongly recommends that as a first step you
sight a sign-off from the borrower's lawyer(s) and financial adviser confirming the
structure as proposed (detailed in the sign-off) does satisfy the SIS Act and the
investment strategy before you move too far down the track.
Q. Can a SMSF borrow to purchase a shareholding in a commercial property and hold
beneficial interest (ownership) as tenants in common with an unrelated party?
A. If the tenant in common ("co-owner") (i.e. with the security custodian) is an
unrelated party of the superannuation fund, then generally the transaction should still
be permitted. In each case, the SMSF must borrow as a sole borrower for the
acquisition of its shareholding (i.e. SMSF cannot be joint borrower) and the third party
would need to execute the limited recourse guarantee and mortgage, and waive rights
of indemnity and contribution. The third party would be required to give an
unconditional undertaking to banks right to sale of property in the event of default by
the SMSF. This is a very broad generalisation and could change depending on the
specific circumstances. Group Legal strongly recommends that as a first step you sight a
sign-off from the borrower's (SMSF’s) lawyer(s) and financial adviser confirming the
structure as proposed (detailed in the sign-off) does satisfy the SIS Act and the
investment strategy
Q. What about if the third party also seeks to borrow using the property being
acquired as security?
A. The simplest method of accommodating a third party’s borrowing needs would be to
utilise alternate security where possible. If not possible, the Third Party, SMSF Trustee
and Security (Property) Custodian would need to enter into a legal agreement for the
purposes of protecting the SMSF assets and waiver of rights of indemnity and
contribution against the SMSF and Security Custodian. It is strongly recommended
that as a first step you sight a sign-off from each of the borrowers’ and security
providers’ lawyer(s) that such an agreement has been reached. This is a very broad
generalisation and could change depending on the specific circumstances. Great care
should be taken when dealing with this type of transaction and it is recommended that
legal opinion be sought for SGB (providing specific transaction and structure details).
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Q. Can two (2) or more SMSFs purchase a commercial (or residential) property as
tenants in common?
A. Yes, as a broad generalisation, the two individual SMSFs could utilise gearing to
acquire shareholdings in a property as tenants in common. Each SMSF will need to have
their own discrete trust arrangement deed with a Security Custodian and a legal
agreement pertaining to the granting of guarantee and mortgage by the Security
Custodian to third party SMSF would be required up front. As a first step you should
sight a sign-off from each of the SMSF’s lawyer(s) and financial adviser(s) confirming the
structure as proposed (detailed in the sign-off) does satisfy the SIS Act and each of the
SMSF’s investment strategy. Great care should be taken when dealing with this type of
transaction and it is strongly recommended that legal opinion be sought for SGB (giving
specific transaction and structure details).
6. Purchase of part parcel of real business property
Q. Can a SMSF borrow to purchase a further shareholding (part) in a business real
property to which it already has part ownership under a tenants in common
arrangement?
A cautious approach to s67(4A) is required. The "asset" acquired for the purposes of
s67(4A) is the percentage (%) being purchased, not the 100% value.
s67(4A) (d) requires that:
" the rights of the lender against the RSF trustee for default on the borrowing, or on
the sum of the borrowing and charges related to the borrowing, are limited to rights
relating to the original asset or the replacement;". Therefore the bank can only take
security over the percentage (%) or shareholding being acquired, and only exercise
rights as mortgagee over the percent (%)/shareholding being acquired. The bank could
not take security over the percentage (%)/shareholding or have access to the sale
proceeds of the percentage (%)/shareholding already owned by the SMSF.
The bank would need to apply the LVR to the value of that percentage
(%)/shareholding being acquired only. That percentage (%) of course won't be worth
much unless the percentage (%) already owned could be sold at the same time.
Extreme care must be taken with establishing arrangements under which if the bank
wanted to exercise your power of sale over the percentage % /shareholding being
acquired. The SMSF trustee would have to agree to sell its unencumbered part of
property, lest it be held that your rights on default are not limited to "rights relating to
the original asset". This fact creates some credit issues in that an inability to realise sale
of full property in event of default raises greater risk for loss by the bank. The SMSF
would need to show extremely strong servicing capacity and early discussions with
Group Credit would be required.
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The asset must be one the SMSF trustee is not prohibited from acquiring (paragraph
67(4A)(b)(ii)). Among other things it would need to comply with the restriction on
acquiring assets from related parties in s66.
As a minimum the bank would need to be very careful that the acquisition was at
"market value". Which is defined as follows (in section 10):
"market value" , in relation to an asset, means the amount that a willing buyer of the
asset could reasonably be expected to pay to acquire the asset from a willing seller if
the following assumptions were made:
(a) That the buyer and the seller dealt with each other at arm's length in relation to
the sale;
(b) That the sale occurred after proper marketing of the asset;
(c) That the buyer and the seller acted knowledgeably and prudentially in relation to
the sale.
It would be dangerous to rely on the bank’s in-house mortgagee valuation (and more
so if you allowed the customer to believe it could rely on it), and extremely dangerous
to rely on the customer's feel for what the value may be, particularly if it was at a
premium to your own in-house valuation.
All in all, the SMSF Trustee may find it simpler, and more cost effective to acquire
another property using a gearing arrangement
Q. Can a SMSF borrow for the acquisition of property under separate title that forms
part of a parcel of commercial properties for lease to business operation as a whole?
A. An example of this type of transaction has been where a motel operation sought to
sell part of the operation (a block of townhouse units under separate title) to the SMSF
and then lease back the property
Q. Can an SMSF borrow for the refinance of an existing investment property loan?
Yes, subject to the property acquired under a gearing arrangement was acquired post
September 2007,and the Property acquisition was / is compliant with the SIS Act and
Bank policy and gearing arrangement is one under a trust arrangement and lending
agreement that complies with the SIS Act and bank policy requirements.
7. Capital Gains Tax enquiries
Q Does the transfer of the legal title of a property, purchased under a gearing
arrangement to the SMSF (beneficial owner) constitute a Capital Gains Event and
crystalise a capital gain to loss based on market values at that time?
A. Draft public ruling, TR 2004/D25, which according to searches has not been
withdrawn, sets out the ATO Commissioner's current view. There is however a
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provision that will ignore this CGT event created by the transfer from the Security
Trustee under section 106-50 of the ITAA provided the beneficiary is "absolutely
entitled" to a CGT asset (i.e. the property).
Paragraphs 62 and 64 of draft ruling TR2004/D25 confirm that neither the taking of
security over the asset in the form of a mortgage nor the potential that the right of the
beneficiaries are subject to the rights of the trustee to be indemnified would prevent a
beneficiary from being absolutely entitled. When the SMSF Trustee's interest and right
of indemnity is made clear, certain and quantifiable, then according to the advice that
would not prevent the beneficiary from being absolutely entitled. It may be
worthwhile having this done contractually. Therefore, the exception in s.106-50 would
apply and there would be no CGT event. This is really an issue for the customer and St
George insists on customers obtaining independent financial and legal advice to ensure
this issue is addressed.
Customers can be referred to The Federal Court case of Kafataris v. Deputy
Commissioner of Taxation handed down on 29 Sept 2008. This case provides further
guidance as to when a particular trust is likely to be treated as an "absolute entitlement"
trust for tax purposes.
Any customer should take heed of this case when drafting their trust deed or any
contractual provisions as this may impact on the availability of the relief from CGT
provided under s.106-50. In particular the deed may prevent a beneficiary from being
absolutely entitled if it:
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allows other beneficiaries to be admitted to the trust;
allows entitlements to be paid to persons who are not beneficiaries, even where
related to the beneficiary in some way;
permit but do not require assets to be transferred in specie to a beneficiary
where the beneficiary has given consent; and
permit the trustee to sell or deal with trust assets as the trustee determines
8. Beneficiary Guarantee enquiries
Q. What is the ATO Ruling relating to the consideration of any Beneficiary Guarantors
repayment as being an SMSF contribution and a taxable payment?
A. The ATO ruling at items 136 and 137 articulates acceptance of guarantors in relation
to the SIS Act with any payment under such guarantees where the guarantor has no
recourse to the SMSF considered a contribution and taxable accordingly.
The following is extracted from the ATO Draft Tax Ruling:
136. Some of the borrowing arrangements entered into by superannuation providers as
a result of the enactment of subsection 67(4A) of the SIS Act have required a person
other than the fund trustees, or a fund trustee in their personal capacity, to provide a
guarantee for the repayment of the borrowed amount.
137. A payment pursuant to that guarantee will constitute a contribution to the fund if
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the guarantor has no right of indemnity against the fund. A contribution will be made
by a guarantor who has a right of indemnity only if the guarantor subsequently forgoes
that right or is prevented from enforcing that right (for example by the statute of
limitations). Clearly, the capital of the fund would not be increased merely if a liability
to one party were extinguished in favour of a liability to another party.
Q. Why do we take the Guarantee and Indemnity Waiver form?
A. The Guarantee & Indemnity Waiver form serves the purpose of:
i.
Limits recourse by the Beneficiary Guarantor to the property geared by the
SMSF only in the event the Beneficiary Guarantor makes payment to clear the
loan facility held by the SMSF
ii.
Provides that the Property Custodian will not transfer title of property to the
SMSF as the beneficial owner in the event the Guarantor repays the loan facility
held for the acquisition of the property by the SMSF. The Beneficiary Guarantor in
effect becomes the lender to the SMSF and in the event of property sale proceeds
may repay the Beneficiary Guarantor
Q. When would the repayment of a loan by a beneficiary Guarantor be treated as a
contribution and become a taxable event?
A. The repayment of a SMSF loan by a beneficiary guarantor would constitute a
contribution when the capital of the fund increases, ie. If the Beneficiary Guarantor
repaid the SMSF loan and there was no increase in value of capital (assets) held by the
fund the loan repayment would not be considered a contribution.
Q. Should a SMSF pay a fee to a Beneficiary Guarantor to create a arms –length
dealing
A. Super funds essentially tax income in 2 ways, complying low tax income (15%) and
non-arm's length income (45%). With respect to section 295-550, which deals with the
special rules that tax non-arm's length income, this has been specifically considered by
SGB. Although there might be a perception that the parties are not dealing at arm's
length (and that is arguable), it is considered that income derived from the arrangement
is not more than the amount that might have been expected to be derived if those
parties had been dealing at arm's length. This is relevant because section 295-550(5)
states that income is only "non-arm's length" if the amount of income is "more than the
amount that the entity might have been expected to derive if those parties had been
dealing at arm's length". As a result it is considered that s. 295-550 does not apply and
therefore the special rules that apply to tax at a penalty rate of 45% non-arm's length
income do not apply.
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9. The SIS Act and ATO Rulings
Q. Why do we need to concern ourselves with the SIS Act Legislation in accepting
SMSF Loan Applications?
The consideration of scenarios may in many instances require additional information to
determine what, if any, SIS Act rules may be relevant in consideration of a particular
transaction. The following rules as contained in the SIS Act may impact the banks
position and enforceability:

Sole purpose test (s62): A SMSF must be maintained for the purpose of
delivering retirement benefits for the members;
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Investment strategy requirement (s62 (2)(f)): A SMSF Trustee must prepare and
implement an appropriate investment strategy that sets out the investment
objectives of the fund and detail the investment methods the fund will adopt to
achieve these objectives. An investment strategy should be unique to the
requirements of the fund and its members; RMs must obtain a copy of the
SMSF’s investment strategy, confirm inclusion of gearing for property
investment; and hold copy of investment strategy on AA file
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Related party acquisition rule (s66): A SMSF Trustee is prohibited from
acquiring assets for the fund from a related party of the fund, EXCEPT when:
- The asset is a listed security (eg shares, units, bonds) and the asset is
acquired at market value
- The asset is business real property and acquired at market value
- The asset is an in-house asset and would not result in the level of inhouse assets of the fund exceeding 5% of the funds assets, or is an asset
specifically excluded from being an in-house asset.
A related party of a fund covers all members of the fund and their associates,
and all standard employer-sponsors of the fund and their associates.
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Arm’s length dealing requirement (s109): The SMSF Trustee must not invest
money of the fund with related or associated parties, and must ensure that
investments are made or maintained at commercial terms i.e. must be at full
market value and return.
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In-house asset rules (s71)
An in-house asset of a superannuation fund is an asset of the fund that is loan to,
or an investment in, the fund’s related party. Generally, SMSFs are restricted
from lending, investing or leasing more than 5% of the fund's total assets to a
related party of the fund.
Prohibition against charging (Reg 13.14)
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The SMSF Trustee must not give a charge over, or in relation to, an asset of the
fund.
Q. Have there been any ATO rulings/guidance since the passing of amendments to the
SIS Act?
A. Yes, The ATO has released draft rulings explaining the prohibition on trustees of selfmanaged superannuation funds (SMSFs) from giving financial assistance using the
resources of the fund to a member or relative under section 65(1)(b) of the SIS Act.
The following is a summary of the ATO’s draft ruling:
“ Under the terms of SMSFR 2008/1, a trustee or an investment manager of an SMSF
contravenes section 65(1)(b) of the SIS Act if the trustee or investment manager uses the
resources of the SMSF to give financial assistance (other than lending money of the SMSF) to a
member of the SMSF or relative of a member of the SMSF, whether that assistance was
requested or not.
The term 'financial assistance' extends beyond the provision of loans and other kinds of
disposition of money or property. Financial assistance can take the form of the giving of a
guarantee, indemnity, security or charge or the taking on of an obligation, or any other
arrangement that, on an objective assessment is in substance to provide financial assistance to a
member or relative of a member using the resources of the SMSF.
Arrangements that contravene section 65(1)(b)
In the Commissioner’s view, the trustee or investment manager of an SMSF contravenes section
65(1)(b) by doing any of the following:
• giving a gift of an SMSF asset to a member or relative of a member
• selling an SMSF asset for less than its market value to a member or relative of a member
• purchasing an asset for greater than its market value from a member or relative of a member
• acquiring services in excess of what the SMSF requires from a member or relative of a member
• paying an inflated price for services acquired from a member or relative of a member
• releasing a member or relative of a member from a financial obligation owed to the SMSF,
including where the amount is not yet due and payable
• delaying recovery action for a debt owed to the SMSF by a member or relative of a member
• satisfying, or taking on, a financial obligation of a member or relative of a member
• giving a guarantee or an indemnity for the benefit of a member or relative of a member
• giving a security or charge over SMSF assets for the benefit of a member or relative of a
member.
Arrangements or transactions that may or may not contravene section 65(1)(b)
Whether the arrangement or transaction contravenes section 65(1)(b) depends on whether the
arrangement or transaction, assessed objectively in a commercial light and having regard to the
facts of the particular case, is in substance a financing arrangement providing financial
assistance to a member or relative of a member using the resources of the SMSF.
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Factors that indicate that an arrangement or transaction is in substance a financing
arrangement providing financial assistance to a member or a relative of a member using the
resources of an SMSF include:
• the arrangement or transaction exposes the SMSF to a credit risk, or exposes the SMSF to a
financial risk, of a member or relative of a member • the arrangement or transaction is on nonarm’s length terms that are favourable to a member or relative of a member
• the arrangement or transaction is not a usual or normal commercial arrangement in the
context in which SMSFs operate
• the arrangement or transaction is not consistent with the investment strategy of the SMSF
• under the arrangement or transaction an amount is paid by the SMSF, and later repaid to the
SMSF, in amounts or in a manner that may be equated with the repayment of a loan whether
with or without an interest component • the arrangement or transaction results in a diminution
of the assets of the SMSF whether immediately or over a period of time.
Conversely, if an arrangement or transaction does not exhibit the above factors this indicates
that section 65(1)(b) has not been contravened. However, the factors are not intended to be an
exhaustive list. The weight to be given to the factors will depend on the particular case.
Moreover, the presence or absence of such factors should not be taken to mean that it is
conclusive that section 65(1)(b) has, or has not been, contravened. “
For more information, use this link to access the ruling:
http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~SMSF~basic~exact&target=EF
&style=java&sdocid=SFR/SMSFR20081/NAT/ATO/00001&recStart=1&PiT=99991231235958&rec
num=5&tot=19&pn=ALL:::RDB
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