5 traps for SMSFs buying off-the-plan
John and Mary are looking to acquire an off-the-plan property through their SMSF.
They need to consider the five following points.
1. Purchaser named on the contract
It is important that the correct entity is named on the contract of sale to avoid any adverse tax consequences.
If John and Mary’s SMSF will not be borrowing then the purchaser named on the contract of sale must be in the name of the trustee of the SMSF.
In the event that a limited recourse borrowing arrangement (‘LRBA’) will be used to acquire the property then the holding trustee (sometimes called the custodian or agent) should be listed as the purchaser on the contract of sale, even though it is the SMSF that is borrowing to purchase the property.
Regardless of whether the purchaser of the property is the trustee of the SMSF or the holding trustee, the description of the trustee or the holding trustee as the purchaser should not mention the name of the fund. Further, no reference should be made to the name of the holding trust where the holding trustee is named as the purchaser. This is because reference to the name of the fund or the name of the holding trust may be regarded in some states such as NSW as a declaration of trust and in NSW full ad valorem stamp duty could be payable on such a declaration of trust.
However, in some states such as Victoria, where an LRBA is being used to acquire the property it is not uncommon for the purchaser named on the contract to complete a nomination form to designate a holding trustee as the new nominated purchaser of the property for the SMSF prior to settlement.
If a nomination is to be made in favour of the holding trustee, then the nomination must be signed and dated before executing the holding trust deed. Further, after the purchase the holding trustee must be the entity registered on title as the owner of the property even though it is the SMSF which is borrowing to purchase the property.
The holding trust deed should also make reference to the fact that the purchaser named on the contract is subsequently exercising their right under the contract to nominate a substitute purchaser for the property under a nomination made in favour of the holding trustee as the substitute purchaser in relation to the property.
2. Order of signing documents
In most states and territories where an LRBA is being used, the holding trust deed is signed after the contract of sale and is usually executed as close to settlement as possible to ensure that the purchaser has sufficient time to attend to stamp duty on the holding trust deed, if applicable.
However, in some states such as QLD there is some debate amongst legal commentators as to whether the holding trust deed should be signed and dated prior to or after executing the contract of sale.
The conservative approach would be to secure the property by executing the contract of sale first and then signing and dating the holding trust deed as close to settlement as possible.
Whilst a QLD holding trust deed does not need to be submitted to the local Duties Office to be marked as exempt from stamp duty, it is important to make enquiries with third parties such as a commercial lender regarding the order in which the holding trust deed should be signed.
Some commercial lenders may require as part of their loan approval process that the holding trust deed is signed and dated prior to the contract of sale before they advance the loan amount at settlement. To prevent delays and further legal fees as a result of having to prepare additional documents to satisfy the requests of a commercial lender, always ensure that enquiries are made with the lender as to the order of signing a holding trust deed, particularly if the property is being acquired in QLD.
3. Is the property a single acquirable asset?
It is not uncommon for an off-the-plan property to be sold with an additional or multiple car space.
However, if an SMSF is acquiring an off-the-plan property using an LRBA, then this raises the issue as to whether the property constitutes a ‘single acquirable asset’. Under superannuation law each single acquirable asset must be acquired using a separate holding trust and separate loan. If there is more than one ‘acquirable asset’ bundled together, using a single holding trust and single loan would be in breach of superannuation law.
The ATO’s SMSFR 2012/1 ruling states that a factor in determining if the property being acquired is a single acquirable asset is whether under state or territory law the two assets (ie unit and car space) must be dealt with together or can be dealt with separately. The Ruling also provides useful examples to illustrate when different types of land/property may and may not constitute a single acquirable asset.
4. LRBAs from a related party of the SMSF
It is important to note that as part of Act No 78 being the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, a member’s share of the liability under an LRBA which is entered on or after 1 July 2018 will be calculated as part of their total superannuation balance immediately before the end of the financial year.
This measure is to apply retrospectively to LRBAs where the lender is an associate of the SMSF or a member participating in the LRBA has satisfied an unrestricted release condition (such as attaining the age of 65 or being retired for superannuation purposed), regardless of whether the member is actually in retirement phase.
If John and Mary decided to seek finance from a related party lender then any outstanding loan balance will be added to their total superannuation balance. A member will be prohibited from making further non-concessional contributions once their total superannuation balance reaches $1.6million.
5. Multiple lenders
If an SMSF is seeking to finance the acquisition of an off-the-plan property from multiple lenders under an LRBA then the loans should be provided when the property is being acquired to comply with superannuation laws.
If the finance for the acquisition of the property is, say, to be split so that if part of the loan is being financed by a commercial lender and the remainder is being financed by a related party lender then it is important to obtain written confirmation from the commercial lender regarding this particular financial setup.
Further, the second mortgage over the property to secure the related party loan will need to be separate and distinct from the first mortgage to the commercial lender.
It is also vital to ensure that the related party’s mortgage is not acting as security for the commercial lender’s loan.
For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email firstname.lastname@example.org to see how we can assist.