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I have a client who is looking at establishing an SMSF to buy a commercial property using a loan. The loan will be from the developer of the property (Vendor Finance ) can you highlight areas of concern so that we do not not breach the riles. The developer is a Non Related Party to the members of the smsf. It will use a Bare Trust Property Custodian Trust with separate Corporate Trustee. All advice of areas of concern will be appreciated.
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Hi Stephanie
I agree SMSFR 2009/2 does require at paragraph 10 that a borrowing must include a "temporary transfer of an amount of money from one entity (the lender) to another (the borrower)". On that basis money is required to change hands to be a borrowing.
A lawyer should be engaged to prepare the bare trust deed and or review that the borrowing will meet the requirements of SIS. Another option is for the trustees of the Fund to obtain a binding ruling if there is any doubt.
I note that the ruling further states:
"41. A temporary transfer of money contemplates a payment of funds from the lender to the borrower. Ordinarily this involves the lender providing money directly to the borrower, which the borrower can then use for their own purposes. However, it is also possible that the temporary transfer of money may occur by way of constructive payment.
42. A constructive payment can occur where one entity, at the direction of or on behalf of a second entity, makes a payment to a third entity. For example, a constructive advance of money is made where a lender provides funds to a vendor of an asset if the borrower is the purchaser of that asset and has an obligation or intention to repay the amount provided by the lender."
Refer below & paragraph 77 in particular that states that such a "borrowing is not prohibited"."
I also note the below from the same ruling and in particular paragraph 77.
"Example 9: instalment purchase agreement
75. Donna and Mary are trustees and members of an SMSF. The SMSF wishes to acquire an asset from a vendor who is unrelated to the SMSF.[43] An agreement is reached under which the SMSF will make ten equal payments to the vendor and in return title will pass from the vendor to the SMSF. The agreement and surrounding circumstances do not reflect a transfer of money from the vendor to the SMSF.
76. This agreement does not give rise to a borrowing of money. Instead the arrangement provides for the acquisition of an asset by the SMSF trustee by way of instalment payments.[44] Even though the agreement provides financial accommodation to the SMSF trustee, not all forms of such accommodation are borrowings of money.[45] Accordingly, the SMSF trustees have not contravened paragraph 67(1)(a).
77. An arrangement involving the SMSF borrowing money, which otherwise displays the same facts as set out in paragraph 75 of this Ruling, including the making of a similar series of payments by of repayment of the borrowing, may satisfy the requirements of subsection 67(4A). In such a case, whilst the arrangement will involve a borrowing by the SMSF, the exception in subsection 67(4A) will ensure that the borrowing is not prohibited, provided that the conditions set out in that subsection are met.[46]"
Thanks
SMSF AAA