Can An Smsf Borrow For An Off The Plan Development?

Can An Smsf Borrow For An Off The Plan Development?

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A recent one involves off the plan (OTP) development. Specifically, the question was raised as to how the ATO views the purchase by a DIY superannuation fund of say, an OTP apartment such as a strata-titled apartment, under section 67A of SISA (the borrowing provisions).

Firstly by way of background, an OTP purchase will typically involve the SMSF signing a contract for the vendor to deliver a completed apartment at settlement. The vendor will then generally enter a contract with a builder to build the apartment and the purchaser merely enters the purchase contract for the completed apartment and land. However there may still be the need to sub-divide the title and build the apartment at the time of signing. Hence, settlement will often be delayed until a certificate of occupancy is issued for the apartment once it is completed and the building surveyor has signed-off that it complies with relevant planning, etc.

So whats the problem for SMSFs ?

Its in the technicalities of Section 67A, which refers to the acquisition of a single acquirable asset and allows a borrowing for purchase but not an improvement.

The big issue is that if it is deemed that the single acquirable asset has been replaced with another asset (where not covered under Section 67(B)) the arrangement has to be terminated.

So you can see where an OTP development process may have a problem.

The SMSF industry view put to the ATO was that an OTP reflecting the above background should not be viewed as an improvement but as an initial purchase, as on contract at settlement, The SMSF simply obtains a completed apartment. Therefore, there should be no problem with a Self Managed Superannuation fund borrowing to undertake an OTP purchase. It was also noted that they can be a more attractive investment as compared to a completed property, with certain stamp duty savings in some jurisdictions.

So what was the ATOs response ?

To begin with, it was not prepared to provide a blanket answer, however it did raise some specific issues that trustees will need to be aware of. Their answer was:

Without more details about the limited recourse borrowing arrangement in mind we are not able to give a definitive answer. For example, would it be the case that the borrowing commences after the apartment is completed and strata-titled (the deposit having been paid by the SMSF trustee)? Any arrangement would need to have in mind the following requirements:

* The acquirable asset must be placed in the holding trust when the borrowing is commenced and held in trust while the borrowing is maintained.
* If the acquirable asset is replaced by another asset in circumstances not listed in section 67B, or in a regulation made for the purposes of subsection 67B(8), then the arrangement must be terminated at or before that time or a contravention of subsection 67(1) results.

However of more significance, the ATO suggested that if the borrowing is made to fund the deposit and to acquire what at that stage is merely a contractual right to acquire title in future property then there is a risk that the replacement of that right by the actual asset would be a breach of the limited recourse borrowing arrangement provisions.

This final paragraph certainly indicates that if your in this position, there are some serious risks to proceeding with this arrangement.

The ATO stated that they would obtain examples of real transactions to enable a proper ATO view to be formed and to provide appropriate guidance. So watch this space.

About the Author:
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Article Originally Published On: http://www.articlesnatch.com


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