SMSF Borrowing - Property Case Studies

As a leader in the field of SMSF Borrowing documentation, we have come across many varied borrowing scenarios. Below are a few common scenarios that our clients have brought to us, and the outcome of each scenario.

Developing related party land

Jack and Jill are trustees of an SMSF. They have a block of land in their SMSF that has no debt, and they would like to use an SMSF Borrowing to build a house on the block of land. Can they do this?

Answer: No.

Reasoning: SMSF Complying Loans cannot be used to develop existing land held in the name of the Super Fund.

Purchasing property from a related party vendor

John and Jane are trustees of a SMSF. John owns in his personal name a residential property he is using as an investment property. John believes the property will very shortly appreciate dramatically in value and wants to sell the property to his SMSF. Can he do this?

Answer: No.

Reasoning: You cannot use an SMSF Borrowing to purchase property from a related party vendor that does not satisfy the related party acquisition rules of SIS. A property can be purchased by a Superfund via a SMSF Borrowing from a related vendor, but only if the business real property test is satisfied.

Purchasing a property to lease to an associated party of the Fund

John and Jane are trustees of a SMSF. John owns and runs an accounting practice, and he wishes to purchase a commercial property to run the accounting practice from. However, he does not have sufficient personal or business wealth to purchase the property in his own name or in the name of the accounting practice. John and Jane decide they would like to utilise a SMSF Borrowing to purchase a commercial property through their superfund, and intend to lease the property to the accounting practice. Can this be done?

Answer: Yes.

Reasoning: Whilst the lessee is a related party of the Fund, the property is commercial property and as long as it satisfies the business real property test the in-house assets exemption will apply. If the property was residential, it could not be leased to a related party of the Fund.

Purchasing multiple properties over multiple titles

John and Jane are trustees of a SMSF. Jane has recently seen notices for a block of apartments recently built that are individually for sale, and at great prices. These apartments have been built by a non-related party of the superfund and are on separate property titles. Jane consults with John and they decide that they would like to use an SMSF Borrowing to purchase two apartments in this new complex. Can they use a SMSF Complying Loan to do this?

Answer: Yes, although they would need to commence two separate loans, one for each property, and have two separate Bare Trusts, one for each property. The two separate Bare Trusts could, however, have the same Trustee.

Reasoning: The Australian Taxation Office’s view of a single acquirable asset in relation to Property is a property held over a single title. As each of the apartments are contained on separate titles, the transaction would constitution the acquiring of two separate assets, and therefore, two separate Bare Trusts and two separate loans would have to be put in place – read the ATO’s interpretation of the SMSF Borrowing legislation – 'Limited recourse borrowing by self-managed super funds - questions and answers'

Purchasing a single property held over multiple titles

Scenario 1

Jack and Jill are trustees of an SMSF who wish to acquire a rural property via a SMSF Borrowing. When Jack and Jill go to sign the contract, they notice the property is held over 5 different titles.

Can Jack and Jill acquire this property via a SMSF Borrowing?

Answer: Yes, although due to the ATO’s interpretation of a single acquirable asset, this transaction would consist of 5 separate assets. Therefore, the trustees of the Fund would have the following options if they wanted to purchase this property via a SMSF Borrowing.

Option 1 – Acquire each title separately.

This would mean each title would have to be held in a separate Bare Trust, and each title would have to be acquired via a separate loan. If a single lender was used, that lender would have to provide 5 separate loans, and each loan could only be secured against the title that was being held in that particular Bare Trust.

In this scenario, 5 separate Bare Trusts would need to be set up, but each Bare Trust could have the same Trustee.

Option 2 – Consolidate the titles.

As each title constitutes a separate asset, reducing the title structure via a consolidation would reduce the amount of Bare Trusts and associated loans that would need to be set up to acquire the property. This consolidation would have to be done before settlement

Option 3 – Purchase some of the titles outright

Another option would be to purchase some of the titles outright, so as to reduce the number of titles being acquired via the SMSF Borrowing, and therefore, reduce the number of Bare Trust and associated loans that would need to be prepared.

Scenario 2

Jim and Sarah are trustees of an SMSF who wish to purchase an office suite in the city. When they go to sign the contract of sale for the property, they notice the office and the car park are on separate titles. Can they acquire this property via a SMSF Borrowing?

Answer: Yes,

As per the example above however, they would either have to have two separate Bare Trust and Loans prepared, consolidate the titles, or purchase one title outright in order to facilitate the acquisition of the property.

If you have a scenario you are not sure about in regards to an SMSF Borrowing, please contact us on 1300 659 242 with any queries you may have.