Page 19 - Loan Structure Solutions

The ATO (which is the body that regulates Self Managed Super Fund)
has not provided much in the way of useful and practical guidance as
to how it will interpret the “newish” law. There were some law changes
in July 2010 which provided slightly more clarity but there are still a
number of outstanding issues namely dealing with apartments that
have two titles (one for the apartment and a car park on a separate
title) – do we need two separate loans and two separate bare trusts for
these even though they are essentially one asset? How do we split
them, etc., etc.? The second issue is the current restrictions in respect
to improving the Super Fund’s property – you can’t while a loan is
attached – so replacing an old kitchen with a new one will be classified
as an improvement. Not allowing a super fund to do this will actually do
harm to the property’s value. Anyway, the upshot is they are very com-
plex transactions and you absolutely must understand all the risks.
Anyone contemplating borrowing in their SMSF must get appropriate
financial and legal advice – it is worth investing some money and time
in obtaining this advice to get it right and avoid problems in the future.

Back to the lending issues. Many lenders will ask for personal
guarantees in respect to the super fund’s loan. This used to be a
concern but thankfully the recent law changes provided more clarity
and most legal advisors are not too worried about personal guarantees
anymore.

In my opinion, the biggest feature to insist on is an offset account.
SMSF’s tend to hold a reasonable amount of cash (and so they should
as a safety measure). Therefore, an offset account becomes very
valuable as you’ll be able to deposit all cash savings in the offset. If the
average cash balance is say $30,000 it will save over $2,000 in interest
per year. Also, being able to offset debt instead of repaying it may give
you the flexibility to purchase more than one property in your SMSF (by
borrowing again using the cash in the offset as a deposit). There are
not many lenders that allow offsets in SMSF’s so choose carefully. Of
course, this is not the only consideration so get some specific advice.

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