Self-Managed Super Funds (SMSF) are a very common way for people now to save for their retirement.
Many small business owners have their own SMSFs and the members of the funds are also usually the trustees either in their own right or generally through a corporate trustee.
All SMSFs in Australia are governed by the Superannuation Industry Supervision Act 1993 (SIS). The SIS provides the framework of how SMSFs must operate and are regulated. It also regulates how the trustee of the SMSF must act and behave.
What is a solicitor certificate?
When a SMSF is borrowing money the trustee and the trustee company are required to obtain independent legal advice as to the nature fo the borrowing and often encouraged also to obtain independent financial advice.
The financial institution lending the money to the SMSF wants to make sure that the as a trustee or guarantor for the loan understands their legal obligations.
A solicitor certificate provides evidence to the financial institution that you have received advice as to the various loan documents and that you understand that the trustee and the directors have obligations to ensure the loan is repaid.
The financial institution will also require the trustee company and the individual directors to provide a guarantee and indemnity that the SMSF will repay the loan.
What is a Guarantee and Indemnity?
A guarantee is a contractual promise by one party (the guarantor) to another party (the beneficiary) to fulfil the obligations owed by a third party (the primary obligor) to the beneficiary.
In an SMSF the guarantor will generally be the directors of the trustee company or in their own capacity along with the trustee company itself. The beneficiary will the financial institution who is lending the money and the third party will be the SMSF itself.
The primary obligor has the ultimate or primary liability for the obligation to pay the money to the financial institution guaranteed by the guarantor.
The guarantor’s obligation is triggered when the SMSF fails to pay the financial institution and is limited to the liability of the SMSF.
On the other hand, an indemnity is a contractual promise by one party (the indemnifier) to compensate for loss suffered by another party (the beneficiary).
Due to the fact that an indemnity is a primary liability it is not dependent on the primary SMSFs failure to perform.
The need for personal guarantees
When a financial institution lends to an SMSF it does so by way of a limited recourse arrangement.
This means that if there is a default the financial institution is limited to recovery against the property that the loan is taken against.
However, the financial institution will require the directors of the trustee for the SMSF to personally guarantee the loan.
The reasons for this is that if the investment fails, the financial institution can sell the property to pay back any the shortfall if there is one.
Obtaining a solicitor certificate
Your solicitor is required to carefully read and explain all the security and loan documents which can include the loan contract, mortgage, guarantee and indemnity etc.
The solicitor will meet with you in person to through all the documents and generally at the same time will you will sign and execute the documents to obtain the SMSF loan.
It is not a simple process and should not be treated as such.
How can FC Lawyers assist you?
Our expert team has over 30 years of advising clients in relation to these types of loan arrangement and in particular SMSF lending.
If you need a solicitor’s certificate or just general advice regarding SMSF matters contact our expert team.
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