Gearing traps plague SMSFs

Five main errors being made

By Darin Tyson-Chan
Fri 12 Feb 2010

There are five common problems SMSF trustees are running into when implementing fund gearing.

Self-managed superannuation fund (SMSF) trustees are experiencing difficulty in several common areas when they are attempting to use gearing within their funds, according to Townsends Business and Corporate Lawyers principal Peter Townsend.

One specific hurdle he identified when it comes to borrowing within an SMSF is a failure to understand the lender's requirements.

"There is a propensity among advisers to assume that the lender's requirements are the same as any commercial or residential loan and that's not the case," Townsend said.

"For example, most lenders will want to ensure a trustee has the relevant power, so if you're going to send a client down to the bank to get a loan for their super fund you had better be sure the deed allows them to do that," he said.

Another trap trustees are falling into with SMSF gearing is not appointing a champion to manage the process.

"Super fund borrowing and the purchase of an asset at the same time is complex procedure," Townsend said.

"It's really important if your client's superannuation fund is going to borrow they appoint a champion who is going to be in charge of the process, is going to drive it, is going to control it, and who is going to know what it is that needs to be done," he said.

Another error SMSF trustees are making with the gearing in their fund is not paying the entire purchase price from the fund's assets.

A contributing factor here is the payment of a good faith deposit, which is often forgotten about at settlement. Townsend recommended trustees treat these payments like a contribution to avoid falling into this trap.

Two other common problems with SMSF gearing were not arranging the stamping of the bare trust in a timely manner and appointing the custodian of the asset as the lender, he said.

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