30/11/2015

This article looks at a few things you need to know if your SMSF is thinking of borrowing from the NAB.

The NAB offers you the option to use their holding trust deed, or what they call a Superannuation Acquisition Financing Deed (“SAFD”) for the limited recourse borrowing arrangement (“LRBA”), allegedly to save on costs. Using a holding trust deed prepared by the lender may seem like a (cheap) good idea but have you thought about what it actually means?

The NAB’s arguments for using their SAFD are that it saves you time and money because:
 
1.    there is no need to pay a solicitor to prepare the holding trust deed;  
2.    NAB has already approved the deed, which means no amendments or delays; and
3.    the same deed can be used for multiple property purchases by the fund.

The fund trustee (as borrower), the holding trustee (called the ‘Security Trustee’ in NAB’s documentation), the guarantors (called ‘Promisors’ in NAB’s documentation) and the NAB are all parties to the SAFD.

There are a number of issues when a bank's lawyers prepare documents for an SMSF client.

Do the bank's Lawyers have to prepare the documentation?

1.    No, this is not the case. On the contrary it is of vital importance to have independent legal advice.

Lawyers acting for more than one party

2.    If the bank's lawyers were to act for the bank and the fund for the same transaction it is generally accepted practice in most States that the lawyer must make both parties aware of the fact that they are representing both parties and seek both parties' consent.  If you are not asked to consent, this means the bank’s lawyers are not acting for you.

3.    The bank's lawyers cannot advise you on the documents they have prepared if they are not acting for you.  You will have to seek additional advice from your own solicitor and these additional legal costs for engaging the different law firm appear to negate any perceived reduction of fees by using the bank’s lawyers.

Extra advice on the process

4.    Using your own superannuation lawyer can help not only with the LRBA documents but also with ancillary advice that can be so important in understanding how to process your fund's LRBA.  Often this advice can be by way of a simple phone call.  You won't get that from the bank's lawyers, who will tell you it is not part of their brief.

5.    We regularly talk to new SMSF clients who seek our help because the standard LRB documents they purchased from an online document provider came with no other assistance or 'after sales service' of any kind.  It is the same when you deal with the bank's lawyers.

6.    The use of a bank's lawyers to provide these services to you can be a false economy that comes with more risk.  In the end it will likely cost you more as you pay those lawyers for the documents and your own lawyers for the other services they need.

Professional indemnity insurance

7.    One of the protections that clients of an independent law firm obtain is access to that firm's professional indemnity insurance if something goes wrong.  You won't have access to that if the bank's lawyers are not acting for you.  Any mistakes that are made could leave you high and dry.

The importance of independent legal advice

8.    Much like the importance of the fund obtaining informed and well-constructed financial advice, it is important that you seek legal guidance and assistance from a lawyer who is acting on your behalf, with the compliance of their fund being of paramount importance.  If documents are prepared by a party who is not engaged to act on behalf of the fund, how will the fund navigate the pitfalls of compliance?

Compliance of fund

9.    Our holding trust deeds are widely accepted by the major lenders (including NAB) without requiring any modification, and while in theory there is nothing preventing the use of an ‘umbrella’ or ‘master’ deed, doing so is likely to cause practical issues (e.g. Duties Offices’ attitude to such a document, transfer duty consideration, etc).
 
10.    The benefit of using our deed is that you know it has been prepared with the compliance of the fund (in particular s67A of the SIS Act) and stamp duty legislation in mind, which may not be the case if the deed has been prepared by a bank’s lawyers. Using the SAFD means that, as part of their due diligence, you may still need to obtain (and pay for) independent legal advice confirming that the SAFD is in fact compliant with s67A.  Remember, if the bank’s lawyers are not acting for you, you do not have access to the lawyers’ professional indemnity insurance if things go wrong, so it’s important to tick all compliance boxes before signing any loan documentation.

Impact on transfer duty
 
11.    Another area of concern is the application for concessional stamp duty.  Based on what we have seen of the way in which the SAFD deed is drafted, it is not capable of assessment under the concessional transfer duty provisions generally available to standard holding trust deeds because the deed itself does not identify the property being acquired.  

While this does not necessarily cause any compliance issue, it will have a major impact on the evidence that needs to be presented when lodging the SAFD – in fact, a lot less evidence is required! You might say “that’s great” but if the ultimate goal is to transfer the property to the trustee once the loan is repaid and only pay concessional duty on that transfer, the trustee may encounter practical issues in the future.

Let’s illustrate this with an example: if you buy property via a LRBA in NSW, a holding trust deed would normally be assessed under s 62B of the NSW Duties Act, which requires evidence that the fund has paid for all the purchase money for the property.  That’s when you submit copies of the bank statements showing the relevant payments and a copy of the loan documentation.  With a SAFD, it is not assessed under s 62B; instead it is stamped under s 58 and all you need to present is the originally signed SAFD.  

When, 15 years later, the loan is repaid and you want to transfer the property in the trustee’s name, you will have to demonstrate that the trustee paid for the property (i.e. there is no change in beneficial ownership) in order to pay nominal transfer duty on that transfer.  Normally this requirement is met if the fund presents a copy of the holding trust deed stamped under s62B (because all the evidence in support of this has already been provided). However, in this instance, the SAFD was stamped under a different section, which means that the fund has not previously had to present evidence that it paid for the property and must provide it to the NSW Duties Office years after the property settled in order to be granted the concession. Unless you are super organised (no pun intended), it’s time to go digging for the bank statements (from 15 years ago!) and hope that they can be located.  If you cannot provide all the relevant evidence, the Duties Office is entitled to levy full stamp duty on that transfer.
 
12.    Also, NAB’s practice appears to extend nationally, which means the question of whether the SAFD meets the requirements of different jurisdictions needs to be considered, given the variations in the transfer duty legislation across the country.  Even then, signing a SAFD may, in some jurisdictions, result in the fund paying more stamp duty on the transaction than if the trustee had used a standard holding trust deed (e.g. in Victoria a standard holding trust deed in which the property is identified is exempt from duty (under s 34) but a SAFD signed in Victoria, by not identifying the property, would instead be liable for $200 duty under s 37).

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.