SMSF Borrowing to purchase an off the plan apartment

In October 2011 a draft ruling SMSFR/D1 was released by the ATO in regards to borrowing to purchase property within a super fund.  Please note this ruling is still in draft format.

The Draft Ruling provides that a SMSF Trustee can enter into an off the plan purchase and use borrowed monies to complete the purchase.

Typically, in an off the plan purchase arrangement, a contract to purchase is entered into and a small deposit, say, 5% of the contract price, is paid at the time of signing the contract. The contract is an agreement to purchase a strata unit if and when the strata unit is constructed. Once the strata unit is constructed, the purchaser must then provide the balance of the purchase monies.

The Draft Ruling provides that so long as the trustee finances the deposit from its own resources, the trustee could enter into a limited recourse borrowing arrangement for the balance of the purchase price.

There was previously some speculation that such an arrangement did not satisfy the “single acquirable asset” requirement. The concern was that the trustee acquired on signing the contract one bundle of property rights and then once the unit was constructed, the bundle of property rights was replaced by the physical structure. The better view is that an off the plan purchase is a contract to buy property if and when the property comes into existence (ie is constructed).

Apartment & Separate car park

In many cases an apartment and its car space are on separate titles. Consequently in buying the apartment two assets will be acquired. However these assets will be linked if they cannot be separately sold and will also be linked in a practical sense in that they form one dwelling.

The Draft Ruling confirms that if the two titles cannot by law be separately sold, then for the purposes of limited recourse borrowing they are treated as a single asset.

Multiple titles

The Draft Ruling also treats two or more titles as being a “single asset” for the purposes of the limited recourse borrowing rules where the multiple titles are linked because they cannot in practice be sold separately.

If a dwelling sits on two contiguous titles, then there is one single asset. For example, a public house which sits on 3 or more titles (because the public house grew by additions and extensions as adjoining strips of land were acquired) will constitute a single asset.

Unfortunately, the linkage must be by law (ie titles cannot be separately sold) or physical structures. Where multiple titles are used in the same enterprise – for example a farming enterprise which is carried on over a number of titles – there will be no linkage. This follows as each title can be separately sold and there will be no physical structures affecting all of the titles.