Tuesday, 11 February 2014

Joint SMSF investors may be at risk: Legal expert

Joint SMSF investors may be at risk: Legal expert

article from : http://www.propertyobserver.com.au
By Zoe Fielding
Monday, 10 February 2014

Investors who buy property with others through a single self-managed superannuation fund could be putting their assets at risk, a lawyer who specialises in the area has warned.
Unless the joint investors are close family members with the same investment goals, they should try to hold the property as tenants in common through separate self-managed super funds (SMSFs), despite higher costs and potential difficulties with lenders, said Allan Swan, director of asset and wealth management lawyers Swan and Yii.
Business partners who buy their business premise through an SMSF of which they are both members are particularly at risk, he said. “If there’s a business dispute between the partners there’s one fund and it can be a recipe for disaster.”
Lenders often demand that limited recourse borrowing arrangements used to finance a single property purchase be held through only one SMSF.
A limited recourse borrowing arrangement is a special type of mortgage used by SMSFs in which the lender can only claim the property that secures the loan if the borrower defaults on repayments. In regular mortgages the lender has full recourse to all of the borrower’s assets.
“What some people do to save [administrative] costs is put all their SMSF assets in the combined fund,” Swan said. “One business partner might have half the property and $100,000 of other investments, and the other might have $1 million in other investments in addition to the other half of the property.”
Members must use a structure know as a segregated fund if they wish to keep their other assets separate within the same SMSF. In most SMSFs, assets are pooled between members and allocated in proportion to their individual balances.
Running a joint SMSF with segregated funds, rather than separate SMSFs can save on costs. But Swan said the segregate parts needed to be administered separately and have different bank accounts, which ate into the savings. Audits could also be more complex and costly.
“[Also], if people are making decisions about the rest of their super, having to get the approval of the other member can be a real pain, especially if there have been disputes between the members,” Swan said.
A better solution would be to negotiate with the lender to allow separate limited recourse loans through separate SMSFs owning the property as tenants in common, Swan said. While lenders may be reluctant to offer the loan arrangements to separate super funds, they may be more accommodating if there’s a risk that they may lose the business as a client, he added.
If the lender will not offer finance to separate SMSFs, Swan said the next best option was for members to keep their other investments in separate funds and only hold the property in the joint fund.
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