Self-Managed Superannuation and Trusts

Memorandum

Kind Attn: Kris and Caitlyn Date:

Address:

Dear Sir/Madam

This is with related to SOA requirement by you for your Trust KARDY FUND to acquire the assets as per schedule 1 and also on the Loan Term sheet as provided to you by Bank.

This SOA provides you an recommendation outline by our financial advisor to help you achieve your objective. We will guide and advice on the proposed structure and rule and regulation of SIS Act 1993 applicable for the acquisition you are planning.

If in any of the recommendation for you has the information to get a certain financial products involved , besides securities, we'll also support you by supplying Disclosure Statement with detailed data and information about those specific product that will help you make a decision or choice which will be well informed and researched .

We also want to inform that the following SOA will be valid till any other changes or amendment is done by there by the Government Authorities or 30 days whichever is less. If the Advice is not implemented within this time frame, it will need to be reviewed for accuracy. Hope it meets your expectation and you would give us an opportunity to be associated with you for your future endeavor.

Executive Summary of Limited Recourse Borrowing Arrangements

Kris and Caitlyn are trustees of the Self – Managed Superannuation Fund named as KARDY Funds with the objective of acquiring the assets and whether the loan term sheet should be accepted or not, what can be objection from commissioner point of Tax or ATO point of view. So, analysis is done to highlight the elements of LRBA Act and identify any potential breaches from SIS Act.

Current Financial Position of the KARDY Fund Trust

Particular

 

Funds Financials- Kardy Fund

 

Cash at Bank

$245000

Assets Detail

 

Asset Value

$613200

Type of Asset

Real property

Vendor

Gazza Smith

Nature of Relationship

Not relative

Purchaser

Kardy SMSF

From the above it can be the value of asset which is property has a value of $613200 whereas the Kardy Fund have only $245000 in their account. So there is deficit of approx. $368200 to acquire this property. The options available with the Trust:

Analysis of Term Sheet for Loan

Term sheet of Bank

Lender

Australian Bank

Borrower

Kardy Fund

Loan Amount(based on TLV)

$361788

Interest ( Accrues on monthly basis)

4%

LTV %

59%

Terms

5.7 Years

Expected Income from Asset (month)

4905.60

Concession -Extra

2083.33

Fund available for Debt Service

6983.33

Monthly Repayment of the loan (EMI)

-5956.87

Charges Over Trustee’s share

Yes

Charges over Asset

Yes

Member’s personal guarantee

No

Term Sheet Analysis

As per the above term sheet it is quite is clear that financially this acquisitions seems to be profitable and viable because the property will be able to clear its own debt by the income it will be able to generate, e.g following cash flow for the next 6 years as investment analysis shows the following on the basis general information available for this Asset investment itself:-

It can be seen that the Asset will not only be able to recover its own debt but also will be able to recover out of pocket expense by end of the 8th to 9th year even if some discounting factor is considered., i.e. the payback period of the property investment is approx. 9 years.

Apart from this there are the others conditions like Charges over Trustee’s share and Charge over Asset. So these are the general risk which are there in any investment loan or mortgage loan, As the Bank will also like to secure its funds. The option here is to see that financial should not be overstated or fictitious like Rental value. This requires a second opinion and further investigation of the property under consideration.

Element of LRBA as Applicable

LRBA –Limited Resource Borrowing Arrangement is (ATO, 2020), is an arrangement where the Trust borrows the funds from the third party to buy single asset (or it may be a collection of similar assets which will have the similar value or market worth) to be held by a separate trust. In this any investment returns earned from the asset goes to the SMSF trustees.

(Harley, 2013) has suggested top five elements to set these kind of LRBA transaction and its compliance as It is important to get the basics correct for such transactions else compliance of the transaction may be lost and one will pay much more stamp duty than required. These are the top five things Trustee’s should know while setting up a compliant LRBA for the investment or purchase of property.

  • Timing of the agreement of contract with relation to the holding the trust deed as it is important to get the stamp duty minimizing. So timing is important to know that what comes first whether the holding of trust deed or contract agreement. In this case it seems that Trust deed is already there for KARDY FUNDS and it has proper authority also to buy the property on loan. Because if timing is not correct then Trust may have to pay ad valorem duty which will be three times instead of once.
  • Purchaser’s name is important in the trust’s agreement Contract of acquisition of the asset, there are few specific needs in many states and territories which must be taken care while entering into the contract there references like “as trustee for the bare trust” or “as trustee for the SMSF” should be avoided. The ideal situation will be if corporates holds the trust but in this case it is not the situation.
  • How security deposit is paid , This deposit must be paid from trust’s bank account so that later on concession on stamp duty can be claimed
  • All inclusions allowed in the contract has to be carefully seen, according to the ATO’s SMSFR 2012/1, fixture is permanent in nature and cannot be removed easily. Inclusions are generally can be split into fixtures and chattels.
  • Any issues when purchasing a property which is off the plan- Off the-plan purchase is something when draft strata plan is used to sell a property unit which are under construction, this type of transaction may create Title issue.

Proposed Structure for Acquisition

Following diagram suggested by Harley shows how the overall transaction in LRBA works

Potential Breaches of SIS Act 1993

SMSF’s Trustees are in fact restricted from borrowing under the Superannuation Industry (Supervision) Act 1993 (SIS Act) with the one difference being under LRBA.

So, to accomplish it, its own trust entity known as a blank Trust (essentially a clear trust) is put in place to legally have the home on behalf of SMSF.

This is referred to as the "single acquirable asset" in tax conditions but always keep in the brain it is able to really apply to several titles of land like several devices on 1 name, a stratum name in which the device and automobile park can't be sold as individually or maybe a factory, warehouse or maybe workshop which is built across 2 titles

(CHAAYA, 2017), suggested that ASIC has announced that it had identified potential breaches under section 29QB of the Superannuation Industry (Supervision) Act 1993 (Cth). This section requires super funds to be transparent and disclose Information on its websites and update it time to time.

  • There is liquidity risk in case the Investment in property makes up a significant part of the SMSF's entire assets. If the Property investment can’t be sold rapidly in the occasion of any default or problem, it might influence on an SMSF's potential risk to meet up with the obligations of its to Trustee's or Members.
  • Trustees really should evaluate their internal control processes to make sure they're complying with section 29QB
  • Borrowing itself can influence the SMSF's potential to fulfil member's benefit obligation
  • SMSF and other superannuation legislation keeps on changing regularly with every successive government. It is sometimes may be difficult to go by these rule changes as well as breaches can easily set you hit back with losses in term of fines with respect to the size of your respective SMSF.

(Sulman, 2010) has mentioned in his write up information in the site, guidance from the Commissioner on section 65(1)(b) of the SIS Act, according to the commissioner following will be treated as contravenes section 65(1)(b) of the SIS Act :-

  • Giving a part for the SMSF asset as a gift to any of the relative
  • Selling any of the investment under its market value to any of its relative
  • purchasing an advantage/ investment for higher value as compared to its market value from a member or even relative of the trustees or members
  • Payment of higher service or solution cost acquired from member or relative;
  • Forgiving a relative’s or fellow member’s debt given by SMSF
  • Giving any indemnity or a guarantee against the gain of a part or maybe to relative
  • Giving any security benefiting any member or maybe any relative.

Recommendation on Limited Recourse Borrowing Arrangements

Above analysis and return on assets it seem that Kardy Fund should go ahead with the acquisition of the asset according to the proposed structure, if it will do then there is no breach of SIS Act 1993, but in case they have some plans then it might be potential risk in future especially at the time of transferring of property in the trusts name once it is debt free. It is also important to be sure that the property under consideration for the investment has potential of realistic income stream and also have potential capital growth. Overall, this acquisition by SMSF needs proper strategy to take into account all the personal situations of Trustees like their age , financial position and risk tolerance (SHORTE, 2017)

References for Limited Recourse Borrowing Arrangements

ATO, 2020. Limited recourse borrowing arrangements. [Online]
Available at: https://www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/limited-recourse-borrowing-arrangements
[Accessed October 2020].

CHAAYA, M., 2017. asic-enforces-superannuation-entities-section-29qb-disclosure-obligations. [Online]
Available at: https://corrs.com.au/insights/asic-enforces-superannuation-entities-section-29qb-disclosure-obligations
[Accessed 2020].

Harley, C., 2013. Getting it right on LRBAs and property. [Online]
Available at: https://smsmagazine.com.au/columns/getting-it-right-on-lrbas-and-property/
[Accessed October 2020].

SHORTE, L., 2017. lrba. [Online]
Available at: https://smsfcoach.com.au/tag/lrba/
[Accessed October 2020].

Sulman, N., 2010. guidance from the Commissioner on section 65(1)(b) of the SIS Act. [Online]
Available at: https://www.cleardocs.com/clearlaw/tax/ato-taxpayer-alert-ta20105.html
[Accessed 2020].

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