SMSF lending strategy

thought it did will contact ato on monday to confirm thanks

cheers ken

Hi Nick,

I've heard that alot of lenders in the market ask for Directors Guarantees which is against SIS act? Is this your understanding as well?

Cheers,

Dan

Kenbeth, a couple of issues
1. Investment strategy must allow for it
2. what security wil the fund have ? ie will you lend the money to an unrelated party on the same terms ?
3. Sole purpose test must be considered but i think if you comply with in the inhouse asset rules + your inv strategy allows for it + you have some security - it will probably pass.

HI ASX re the dirs guarantees it is actually a taxpayer alert TA 2008/5

TA 2008/5 - Certain borrowings by self managed superannuation funds

it is not law but merely their view. Most mortgage brokers & banks will argue exactly this, however I can actually understand why the ATO have taken this line and at this point in time have told any of my smsf clients that are considering this type of product to avoid pers guarantees.
I have met with one lender who has such a product but as a result it is not cheap

My recommendation to anyone considering this is to explore all other options first then if they decide to proceed to ensure they receive a compliance letter from their accountant or better still the auditor of their fund. a couple of lenders that are on the mark are asking for this anyway. After all the lender will be quite exposed if the fund becomes non complying.

Fun huh

Cheers
Nickm

Hi NickM,

The Tax Alert is saying to me that the ATO aren't quite sure whether or not it will "meet the conditions in subsection 67(4A) and/or breach other provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act), as well as related superannuation rules."

Sounds like a typical regulator not quite sure of which view they should be taking. I remember when TTR/NCAPs started and the ATO wasn't sure, I think it took them a good year to advise everyone that it was ok and they weren't going to prosecute in relation to Part IVA.

We'll just have to keep an eye out and see if they make up their mind.

Cheers,

Dan

On a strict legal interpretation, the giving of a guarantee means the loan is not a limited recourse form.

Since SMSF Directors are members this is even more so.

Cheers,

Rob

I can see where the ATO is coming from, the loan may be non-recourse but if the personal gaurantee was to be triggered by the bank on a member, this could in turn trigger financial hardship for the member and super is then accessed.

As an aside, its a bit much some of the lenders asking for these guarantees when you see the costs involved, the high interest rates and the LVR's involved.

Hi MattR,

I agree, I have heard that one loan (which doesn't get directors guarantees) is 11.7% pa for interest plus some small set up costs. After thinking this was expensive I remembered that most credit cards are mid to high teens (albeit, we don't usually buy property on a credit card!).

Cheers,

Dan