Loan Theory

The Security Custodian Trust is an entity that must be established completely separate from your SMSF.  The Security Custodian Trust will have a Company as a Trustee.  When a SMSF wishes to borrow to purchase a Property, the Property must be acquired by the Security Custodian Trust and not the SMSF directly.  The Property purchased is held on Trust by the Security Custodian Trust on behalf of the SMSF which has a beneficial right (but is not obligated) to acquire the Property from the Security Custodian at a future point in time, usually when the Loan is repaid.

Whilst the Security Custodian Trust will actually purchase the Property it is the SMSF who will borrow from the Lender (St George) to fund the Property purchase.  In return the Trustee of the Security Custodian Trust will provide a mortgage over the Property Purchased to the Lender as security for the SMSF Borrowing (which must be a Limited Recourse Loan).

As detailed above the Security Custodian Trust will provide the Property purchased as security for the Loan made to the SMSF.  This is the only asset that can be pledged to the Lender as security for the loan made to the SMSF.  In this way, the Lender's right to recover is limited to the Property purchased in the Security Custodian Trust. This means that in the event that the SMSF defaults on the Loan the Lender can repossess or sell the Property only, but cannot repossess or sell any other SMSF Asset.

Importantly under the above arrangement the SMSF must have a right to acquire legal ownership of the Property from the Security Custodian Trust by making agreed installment payments after the Property is purchased.  Practically this means that under the above arrangement the SMSF will acquire the Property from the Security Custodian Trust through a series of agreed installment payments which typically will work as follows:

1.     The SMSF will make an initial upfront payment of part of the Property Purchase Price (eg deposit);

2.     The SMSF will repay the Lender (St George) in Installments until the asset is repaid in full.

As the SMSF is the "Beneficial Owner" of the Property (the Security Custodian Trust is the Legal owner of the Property until the Loan is repaid) the SMSF is entitled to all Property Rent and will be responsible for paying all Fund Expenses such as rates, insurance etc.

On the repayment of the Loan to the Lender (St George) the Property purchased can be transferred from the Security Custodian Trust to the SMSF.  Based on current legislation and assuming the above arrangement has been correctly implemented, the transfer will not be subject to CGT and nominal Stamp Duty will apply.

When the asset is sold, the SMSF Trustees must use the proceeds of sale to repay the loan.  The balance of the proceeds of sale can then be kept in cash or used to buy another asset.  However, the existing loan cannot be used to buy another asset.

SMSF Loan Arrangements are complicated!  Failure to correctly implement the above arrangements may result in a breach of superannuation laws. The breach may mean the SMSF is not complying, which may result in significant tax penalties or may result in civil or criminal consequences for the Fund Trustees.  So it is important to get it right.  As a result of this complicated process ESUPERFUND will attend to the entire setup process ensuring the Property purchase is executed correctly.