The Federal Government introduced legislation on 24^th September 2007 to allow super funds to borrow under certain conditions. This procedure is commonly referred to as a Warrant but it can be called by any name. There are many places were the warrant documentation can be arranged but primarily they can be drawn up by the bank or your own lawyers. Any eligible asset can be purchased this way.

The bank will want to review any document you present. Our experience to date has shown that the terms and conditions from the bank are not as favourable as if the loan was direct to the individual/s or trust because the banks is required to take less security under this legislation than they would otherwise require. Under a warrant arrangement the only security that can be taken is the asset being acquired, normally the bank may take other assets as security and or personal guarantees but these additional securities under a warrant are not allowed. These additional costs are in the form of:

1.       Higher interest rate

2.       Lower LVR

3.       Shorter time period

The above three cost imposts greatly add to the ongoing costs and while sometimes the banks documentation appears relatively cheap compared to external documents the additional ongoing costs far outweigh the difference in document costs.

At Chan & Naylor we have recognised the issue of the banks higher costs and have developed our own warrant documentation which we call the C&N Pension Trust. Our documentation allows you to borrow in your own right. Since the superfund is not identified in the documentation you potentially can borrow at better terms and conditions and then pass the loan onto the superfund. You would give the normal security he bank requires.

Practical Operation of the Chan & Naylor Pension Trust

The SMSF provides funds for the deposit (and any costs if appropriate). The individual/s borrows the balance using any security and or serviceability they would normally be required to give for the loan. The property  being acquired is given as security for the loan plus any guarantees the bank requires from the individual/s. The name on the contract of sale is the name of the trustee of the bare trust i.e. ABC Pty Ltd. The bare trust does not mention or relate itself to the SMSF. It is therefore the individual/s who are the borrowers and not the SMSF. The individual/s on loan the borrowed funds to the SMSF only taking the property as security from the SMSF, this limited security which the SMSF gives is referred to as a limited recourse loan.

The C&N Pension Trust would be set up to allow any funds needed to pay interest shortfalls or any debt reduction to be paid over as an instalment. The property can stay in the bare trust indefinitely as a SMSF asset or it can be transferred if required to the SMSF when the final instalment (loan is fully repaid) is made with no CGT or stamp duty even if the SMSF is still in accumulation mode.