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Self Managed Superannuation Fund (SMSF) Property Loans
May 2013
Overview
This presentation aims to provide:
• An overview of the legislation changes permitting Self Managed Superannuation Funds (‘SMSFs’) to borrow for the acquisition of investment property
• The requirements to be met by SMSFs seeking to enter into a gearing arrangements for the purpose of acquiring property as an investment class
• An overview of the St George Group’s product and servicing offerings to meet SMSFs investment and gearing needs
3
Changes to Legislation permit SMSF’s to borrow
In September 2007, the Australian Federal Government amended the Superannuation Industry Supervision Act (SIS Act) permitting Self Managed Super Funds (“SMSF) to pursue geared investment strategies and borrow in prescribed circumstances to purchase assets they would otherwise not be permitted to acquire.
What has changed?What has changed?
Why?Why?The changes to legislation enable:
Accelerated growth in total assets held by SMSF’s in Australia
Greater diversification of investments for improved performance
Support Govt strategy to build a self supporting aging population
SMSF benefitsSMSF benefits Enables diversification of investment strategy to include property acquisition
Flexible repayment options supporting continued investment diversification
Potential to accelerate wealth accumulation
Potential to improve returns
Gearing & Capital Gains Tax benefits may be realised
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The Borrowing Structure
Trustee
• SMSF must be a SIS Act compliant SMSF permitted to enter in a gearing arrangement
• SMSF Trustee borrows for investment purposes only
• ‘Property Custodian’ Trust (“The Trust”) takes legal ownership of the property
• ‘Property Custodian’ Trust (“The Trust”) gives a Limited Recourse Mortgage over the property
• Servicing must be proven based on income derived by the SMSF alone ( Existing income+ proposed rent + annual member contributions)
Key PointsKey Points
• The SMSF Trustee, when expressly permitted to do so, borrows directly from the Bank.
• The Trust is a separate entity (registered company requirement is stipulated by St. George) which acts as a ‘property custodian’ and holds the legal title to the property being purchased until the loan is fully repaid by the SMSF.
• A Trust Arrangement Deed is required to specify the arrangement between the SMSF Trustee and and the Trust acting in the capacity of property custodian
• The Trust acts as security provider executing a limited recourse mortgage over the property being purchased ( or guarantee and mortgage)
• For commercial property purchases the Vendor may be a related party (e.g. related family company or an unrelated party)
• SIS Act prohibits the SMSF Trustee from acquiring residential property from a related party, therefore all residential property purchases must be from unrelated parties on commercial terms
• Income for servicing must be proven based on servicing capacity of the SMSF only.
• Lessor of the property will be the custodian.
5
Purpose and Availability
Available for:Available for:
Property acquisition only for:
• Non specialised commercial properties
• Residential properties being houses, units, and villas/townhouses
• Specialised Commercial property (compliant with SIS Act and acceptable under bank policy)*
• Investment purposes only
• Loans secured by 1st Registered Limited Recourse Mortgage only
· Not Available for:Not Available for:Acquisition of:
• Owner occupied residential properties
• Vacant Land
• Property Construction
• Property refurbishment or renovation
• Low doc applications
• Refinances
Guidelines*Guidelines*
Funding for the purchase of specialised commercial property may be considered subject to specific conditions being met:
• The specialised property asset must be confirmed as complying with the SIS Act
• Security property is acceptable under standard bank credit policy
• Property is to be purchased on commercial terms for investment purposes only with formalised lease arrangements
• Loan term sought is equal to or less than the term of the lease
• Strictly excludes Aged Care facilities
6
Available products & specifications
Commercial Property Commercial Property
• Commercial Loan Variable (CLV)
• Commercial Loan Fixed (CLX)
The products are as per standard specifications with the following exceptions:Fees Differentiated margins and establishment fees are applicable to accommodate the risk associated with
limited recourse nature of SMSF lending;
Loan Amount Minimum $250k – Maximum unlimited
Loan Term Minimum 1 year, Maximum 15 years ( unregulated commercial loan – Commercial property only)
Minimum 1 year Maximum 25 years (unregulated Business Loan – residential property only)
LVR 90% of normal LVR
Eg.1. For non-specialised commercial property security the maximum LVR is 65%
Eg.2. For permitted residential security the maximum LVR is 72% (90% x 80%)
Security Structure/s Restrictions as to property types are imposed for both commercial and residential property and specific security structures are dictated.
Servicing Assessment
Servicing assessment must be limited to the SMSF existing and proposed incomes only (including member contributions up to ATO non concessional cap/s. Standard CCR policy applies – Guarantee from the Member required – full disclosure of income.)
Covenants Specific SMSF lending covenants apply relating to commitment cover and LVR maintenance
Documentation SMSF specific documentation is to be used in all cases. The documentation provides for limited recourse nature of SMSF lending and is compliant with the SIS Act requirements.
Residential PropertyResidential Property
• Business Loan Variable (BLV)
• Business Loan Fixed (BLX)
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Pricing
Investment plans preparation and advice Property Valuation – Standard
residential/commercial valuation rates apply Preparation of loan and security documentation
by an external Panel Solicitor Structure compliance costs including:
- vetting of Trust Deeds/Trust
arrangements
- confirmations of compliance with the
SIS Act Independent financial advice Independent legal advice Settlement Fee of $200 must be collected Facility Drawdown fee of $100 to be collected on
drawdown date Early Repayment Administration Fee of $200 per
repayment (for fixed rate loans) Loan Transfer Fee (from/to Variable Rate from/to
Fixed) $200 payable per transfer
Additional costs payable by the Additional costs payable by the borrowerborrower
Must include minimum establishment fee of $1500 or 0.25% whichever is greater
Standard service/line fees to apply
All external documentation costs to be met by the borrower
Govt registration and stamp duty costs apply
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Servicing & Repayment Options
Assessing Servicing CapacityAssessing Servicing Capacity• Servicing is to be assessed using the SMSF
income sources only
• Strictly no third party incomes allowed ( potential to breach ATO requirements)
Repayments for the facilities can be:
Interest only terms up to 5 years are available
Interest only, paid monthly in arrears
Interest in advance for a maximum period on 12 months
Principal & Interest paid monthly in arrears
Variable – Additional repayments can be made throughout the term without penalty.
Fixed – Additional repayments made during the fixed rate period may incur penalty charges
SMSF Income Assessed on the last 3 years tax returns / financial reports
Subject to confirmation of continuing returns on investments
PLUS
Rental Income 80% of proposed rental income from the purchase property
PLUS
Member Contributions
80% of member contributions
Subject to assessment of family business trading results/ financial reports and confirmation of capacity to continue to meet obligation of member contributions.
Must be no more than the non- concessional CAP as dictated by the ATO
Repayment OptionsRepayment Options
Capitalisation of interest is prohibited
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Security
Acceptable SecurityAcceptable Security
Unacceptable SecurityUnacceptable Security
Additional Security?Additional Security?• Security is to be taken in terms of standard policy
• Strictly to include;
1st registered limited recourse mortgage over commercial/residential property
Guarantee limited for facility supported by 1st registered mortgage
• Guarantees are not mandatory. If Gtee is to be taken the Guarantors right of indemnity against the SMSF and SMSF Trustee and ‘property custodian’ are expressly excluded
2nd or subsequent registered mortgages Full recourse mortgage from SMSF or ‘Property
Custodian’ Trust Vacant Land Company Title Property under construction Rural Charge or M/- over any other assets owned by the SMSF Specialised Residential Property including boarding
houses, retirement village units Specialised Commercial property excluded from
Exceptions guidelines
Whilst it is preferable to have stand alone security structures, additional security can be taken from related entities on the basis:
• The additional Security is not required to support servicing, i.e. Servicing is assessed excluding external related party income
• Any third party security should prudently be limited in recourse and the security provider should waive rights of indemnity and contribution.
• Specific policy requirements for taking third party security are met.
• Specific pre-conditions are included in relation to third party security provision.
Covenants and Conditions
Covenants • Minimum Commitment Cover Ratio of 1.50 times• Must maintain LVR requirements for the term of the facility• Bank reserves the right to revalue security property (at the customer’s cost) at any time
during the loan term
Any breach will constitute an event of default
Standard Pre-Conditions
• SMSF must provide a declaration of being compliant with the SIS Act • SMSF must make declaration that gearing in property meets the SMSF investment
strategy requirements• SMSF Trust Deed must be vetted by panel solicitor • Trust Arrangement Deed (SMSF & Security Custodian) must be vetted by panel solicitor • Independent legal advice must be obtained by the borrower being the SMSF
Trustee prior to assessment• Independent legal advice must be obtained by guarantors including the Security
Custodian • Independent financial advice must be obtained by the borrower being the SMSF
Trustee • Independent financial advice must be obtained by guarantors including the Security
Custodian
Post Settlement Conditions
Additional Security
Pre-Conditions
• Annual certification of continued compliance with SIS Act• SMSF must provide copy of Annual Financial Reports and Tax Returns in support of
annual facility review. • Pre-conditions are dictated by the entity providing additional security
11
Where can I go for further information?
BankSA Business Banking CentreBankSA Business Banking Centre
Business Development ManagerBusiness Development ManagerBarbara JonesBarbara JonesM: 0412158187M: 0412158187