02/03/2011

So, you’ve finally got your head around using your superannuation fund to borrow to purchase property, but what about borrowing to purchase ‘off the plan’?

First and foremost, you are still required to comply with the five elements of S.67A of the SIS Act:

1. the money borrowed must be used to acquire “a single acquirable asset”;
2. the asset must be one that the SMSF would be permitted to purchase and own regardless of whether or not it borrowed to buy it;
3. the asset must be held on trust by another trustee (‘the Holding Rrustee”) so that the SMSF Trustee acquires a beneficial interest;
4. the SMSF Trustee must have the right to acquire the legal ownership of the asset by making one or more payments; and
5. the rights of the lender or any other person for default on the borrowing must be limited to rights against the asset only and not against any other of the borrowing fund’s assets.

So, provided that:

• the purchase will be in the name of a Holding Trustee,
• the loan and holding trust documents give the SMSF trustee the right to acquire the full ownership of the strata unit by paying one or more payments under the loan, and
• the loan documents drafted restrict the lender’s rights on default to action only against the property being purchased, namely the strata unit

we only have two remaining elements to consider.

Is the fund acquiring a ‘single acquirable asset’ in the purchase?  There is no doubt that a single strata unit on a single title certificate will qualify as a ‘single acquirable asset’, despite the fact that s67A does not provide a definition of the term.

There is, however, doubt as to whether a strata unit on two titles – say, one for the unit and one for the garage(s) – would qualify.  Seeking ATO approval prior to purchase would be prudent in this instance.

We have heard of commentary suggesting that because the home unit is not in existence at the time of the exchange of contracts that the borrowing rules are breached because there is a change of asset prior to settlement.  We do not agree with these comments.

At the time of exchange of contracts there is no borrowing and the borrowing rules do not apply.  Therefore the change of nature of the asset from the date of exchange to the date of settlement is irrelevant and not covered by the borrowing rules.  The borrowing rules apply when there is a borrowing, namely on settlement.

Finally you should ensure that the fund is acquiring an asset that it would otherwise be entitled to purchase regardless of the borrowing. 

One last point of caution. Often Deposit Guarantee Bonds are used for deposits in off the plan purchasing in order to avoid the Purchaser from tying up their capital over an extended period while awaiting completion of construction.

Borrowing by superannuation fund to finance the deposit should be avoided.  There are too many issues and risks that could place such a borrowing in breach of s.67A.  Given that most such deposits are only 5% of the purchase price, borrowing to finance this relatively small proportion of the total may constitute a substantial risk for minimal benefit.

If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.