Generally speaking, super funds are not allowed to borrow monies under the strict rules which regulate them. This is try and mitigate the amount of risk that people can take on when investing their superannuation funds.
There is however an exception referred to as ‘limited recourse borrowing arrangements’ which permit mortgage-backed borrowing, providing strict conditions are met, including the setting up of a bare trust structure.
The bare trust is a separate legal entity to the super trust whose trustee holds only one asset: the legal title to the mortgaged property.
The beneficial interest of the mortgaged property, however, is held by the self-managed super fund. As beneficial interest holder, this means that the SMSF is entitled to all of the rent and other proceeds of the property.
Providing this structure is adhered to and the two trust deeds are set up correctly (permitting borrowing and investment in the proposed assets), then the SMSF can borrow money from a bank to purchase the property.
As the security for the loan will however be limited to the property and no other assets of the SMSF, it is standard practice to provide for personal guarantees from the directors of the SMSF (and sometimes, for safety sake, a guarantee from the bare trustee itself).
This structure with two trusts and potentially multiple guarantees usually means that SMSF mortgage documentation is quite dense and complicated.
Coupled with that, banks usually require guarantors to obtain independent legal advice (‘ILA’) from a solicitor to make clear the nature of their liability (which, unlike with respect to the SMSF, is not limited in recourse to just the property).
Dott & Crossitt is able to provide ILA for clients involved in SMSF structures all over Australia. If you wish to make an online appointment with one our solicitors, you can do so here: https://calendly.com/dottandcrossitt/on-line-legal-advice-witnessing-documents
