Case Study: Multiple SMSFs in a Unit Trust

Have you ever thought about using all that money in your SMSF to buy a commercial or industrial property? What about going in together with one or two friends or family, using their SMSF funds to buy a bigger property together?

This can be an exciting prospect, particularly for business owners who are sick of paying off their landlord’s mortgage – but once people find out about the long list of very strict restrictions under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”), the excitement can quickly turn into what seems to be a solid brick wall.

A Brief History of Why Banks Don’t Like Lending to SMSFs

Until 2007 (yeah, the heydays a few minutes before the financial world collapsed!), legislation made it almost entirely impossible for SMSFs to borrow money from a bank to purchase a property. They brought in what’s known as “Limited Recourse Borrowing Arrangements” (LRBA).

But then what happened was that tens of thousands of Mums & Dads were convinced by property spruikers that the best investment strategy around was to pile 100% of their Super into an SMSF and buy the “safest investment in existence” (and to be clear, this was the spruikers’ line, this is NOT advice from us!!) – residential property – and usually, that was a tiny shoebox apartment in a massive apartment development.

With the size of the potential market and the ethics of the spruikers being an inverse relationship, it’s not too hard to guess what happened over the course of time. Yep, you guessed it – as the value of those shoeboxes dropped, the debt-leveraged superannuation life savings of countless Mums & Dads vanished into thin air.

Then along came the Royal Commission into Banking. You know how that went – “all banks are evil” was the general sense that came out of that, with the most evil of players in the game (being the property spruikers, together with the trusted financial planners and mortgage brokers that played a very very large part in the whole game!) getting off pretty lightly for the most part.

So what did the banks do? Well, in classic bank fashion, they had a complete knee-jerk reaction. Rather than reviewing each loan application more closely, most just completely withdrew from lending to SMSFs. Not only for residential property, where the vast majority of the dirty business happened – but from every type of property, including commercial and industrial property.

Does Borrowing in your SMSF for Commercial Property Make Sense?

Firstly, the Disclaimer is a personal opinion only and must not be construed as financial advice; you must seek professional taxation and financial advice before considering purchasing a property and/or borrowing in a Self Managed Superannuation Fund.

Our view is generally that RESIDENTIAL property in an SMSF rarely makes any sense. However, it can still be very sensible and attractive for commercial and industrial property, particularly for business owners wanting to buy their own premises.

Subject to the specific factors that must be considered – including but not limited to a property’s specific market yield, the rent you’re paying in your business, the property’s purchase price, the importance of having the security of long-term tenor in your property, the taxation implications of renting vs buying in various structures, etc. A lot to consider, so a number of professionals must be involved when considering whether it is a good idea for your specific situation.

Complexities of Borrowing in an SMSF (the normal way)

Borrowing in your SMSF to buy a property is not a simple structure. Purchasing and borrowing need to be undertaken via a “Bare Trust” structure, which is neither easy nor particularly cheap to set up (but certainly not prohibitive either).

Because the majority of the Banks have withdrawn from lending to SMSFs (except in limited circumstances, namely medical professionals and very-high-net-worth individuals), the loan terms available from those who still lend are usually nowhere near as favourable due to the limited options available.

So How Do You Put Multiple SMSFs Together?

An interesting alternative may help you get around this issue – although we’ll note that it’s no silver bullet because the major banks still don’t want to play. But it can be a great solution for those who want to band together.

Way back in the day – if you set this up before 1997 (yeah, I’m showing my age!) – there was a Unit Trust structure that was later sometimes referred to as a “Golden Goose SMSF”. Quite simply, your SMSF would buy 100% of the Units in a Unit Trust – and then the Unit Trust was allowed to buy and borrow completely normally. But in 1997, that got squashed by legislation. But it’s not necessarily completely dead…

If an SPV (Special Purpose Vehicle) Unit Trust is set up, wherein none of the SMSFs nor the parties related to them (e.g. the beneficiaries of said SMSF) has control of the SPV, then it can potentially buy and borrow just like a normal Unit Trust – even if you set it up today.

That “control” needs to be measured against several methods, with the most obvious being that nobody (their SMSF, themselves and any other related entity) can have more than 50% ownership of the trust. Again, an expert professional needs to assess the specifics to decide whether all boxes are ticked to comply.

Pass that test, and the Unit Trust can then act and borrow like any normal unit trust. As far as the LAW is concerned, anyway. Because the next hurdle is that – irrespective of the completely legitimate legal structure – the major banks are still usually unwilling to offer finance under this structure. Go figure…

Getting Finance for an SPV Unit Trust with Multiple SMSFs

Therefore, finding alternative lenders willing to provide finance at reasonable interest rates is necessary.

But there are a lot of hoops and hurdles involved – so once again, you need a number of expert professionals who understand the complexities of this specific structure – including a lawyer, accountant, financial planner and, finally, a finance broker. Don’t even think of using any one of these who hasn’t “been there done that”, because the process will likely then get completely messed up.  

This is exactly what we did recently for one of our clients – three families who all wanted to combine their SMSFs’ funds into buying a commercial property that the related business was renting.

Having dealt with this structure numerous times, STAC’s Mark Trayner considered the client’s situation to be potentially fitting for such a structure. Mark brought in an SMSF-expert accountant and lawyer who undertook a detailed review of the situations and intentions of the three families before giving them formal expert advice and then setting up the structure.

We then negotiated a lending structure with a 2nd tier Bank, who were willing to ignore the “noise” about SMSF lending and instead – subject to their satisfactory legal review – were willing to lend based upon the legal facts and the common sense strength of the proposition.

Thinking about Borrowing to Buy a Commercial Property?

We understand that knowing whether or not you should invest in commercial property via your SMSF can be complicated, so if you like the idea but need advice on whether this option is right for you, get in touch with us today to start the conversation.

If it sounds to us like it should work, we can refer you to expert legal, taxation and financial planning professionals, who can jump on your team to give you the formal advice so that – if you can comply and it makes sense for your situation(s) – we can help you achieve your goals of owning your own commercial or industrial property.

This information is only intended as general financial advice and should not be considered personal financial advice. Before making any financial decisions, it is important to consider your own personal situation and objectives. All persons should seek independent advice from qualified and licenced legal, taxation and financial planning professionals before relying on any of the information herein.

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