Considering Borrowing For Real Property In Your Self Managed Super Fund

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On 7 July 2010 new legislation was introduced governing how superannuation fund trustees may borrow under what is termed a "limited recourse borrowing arrangement”. This is considered a “non-traditional” borrowing arrangement used for acquiring an asset (commonly real property).

There are a number of issues that trustees need to consider before they go down the borrowing route, and obtaining advice from a specialist would be the first step. As with all superannuation funds, the governing legislation is the Superannuation Industry (Supervision) Act 1993 as amended. For self-managed superannuation funds (SMSFs) the regulatory body is the Australian Taxation Office (ATO).

Similar to the old law, the new law requires the asset being acquired with the borrowings to be held on trust. The law does not specify what type of trust, however, the ATO has expressed the view that the trust on which the property is held can never be a bare trust.

Multiple loans for real estate if spread over more than one title

The new legislation states that a borrowing must be applied for a ‘single’ asset.

SMSF ...
... trustees who are looking to acquire an apartment need to be mindful of this since many apartment blocks have a title for the apartment and another title for each car parking space. Similarly many farms have different crown allotments and may be spread over multiple titles.

The ATO suggests that where assets are for practical purposes inseparable or where they are an incidental ancillary asset of little value, the assets may be treated as one asset. However, the ATO further states that “a strata title with an accessory car park and a commercial premises over more than one title” do not necessarily fall within this category. With the ATO saying it would need to consider the facts of a particular case to make a decision, unless a trustee has received specific SMSF advice from the ATO, the conservative approach would be to treat each title as a separate asset, with a separate loan required for each asset. Similarly any furnishings or non-fixtures not included would require separate borrowing.

However, as not all banks are willing to lend on this basis, SMSF trustees should first check whether the property is spread over multiple titles before signing any purchase contract; and if it is they should be sure that they are comfortable with the implications before proceeding further.

Remember, if the trustees get it wrong it could risk the complying status of the fund.

Borrowing to acquire an off-the-plan (OTP) apartment

An OTP apartment is usually purchased under a contract where the purchaser acquires the right to the apartment in the future (eg in 12 – 18 months' time, the subdivision has occurred, the apartment is built and the purchaser obtains a separate title with a completed apartment).

Under the new law, borrowing for expenses incurred in improving the acquirable assets is not permitted. The ATO has indicated that, subject to the timing of the borrowing, the purchase of an OTP apartment may be considered an improvement rather than the purchase of a completed apartment.

It is understood that financiers will generally only lend on the security of OTP apartments after the apartment is substantially completed, so trustees wanting to purchase OTP via a SMSF borrowing arrangement should consider obtaining specific SMSF advice before proceeding to ensure that their particular OTP arrangements will satisfy the ATO’s criteria for the new law.

There are many other issues and SMSF trustees should ensure they are familiar with all the requirements before entering any borrowing arrangements. Ensure your SMSF retains its complying status – see Andrew Frith of Leenane Templeton The Self-Managed Super Specialists Pty Ltd who will assist you in understanding your self managed super fund requirements.

Disclaimer
The information contained is based on information believed to be accurate and reliable at the time of publication. Any illustrations of past performance do not imply similar performance in the future.
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This information is of a general nature only. It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor. Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs.
Leenane Templeton The Self-Managed Super Specialists Pty Ltd is a Corporate Authorised Representative of Lonsdale Financial Group Limited. Level 41, 120 Collins Street, Melbourne VIC 3000. Australian Financial Services Licensee, Licence Number 246934, ABN 76 006 637 225. Andrew Frith is a sub-authorised representative.