Can You Subdivide Land You Have Purchased Under A Smsf Loan ?

For trustees who currently hold vacant land under a limited recourse borrowing arrangement, its been a difficult one to resolve. Whilst sub-division did appear to be allowed under the former rules s 67(4A), clarification has been required as to whether the recent changes to the super borrowing laws have altered the position. As youll see below, the ATO has now clarified its position.

Firstly, lets understand the problem. If it is deemed that the sub-division lots of the land are in fact a different asset to the original land, then we are probably looking at non-compliance with section 67A(1)(b) to (f) because the features of the arrangement are now no longer in respect of the acquirable asset. The other problem that emerges is that the in-house assets exemption in section 71(8) will probably also be lost, as the only property of the trust is no longer the acquirable asset.

If we look at the explanatory memorandum (EM) to the SIS Act in regards to the new sections 67A and 67B which cover limited recourse borrowing arrangements, it states that a series of titles over land that replace a single title over land that has been sub-divided is not a permitted replacement asset.

Now that initially seems pretty clear cut. However the assumption here is that a land sub-division will create a new and different asset, and the point is made that there is no discussion in the EM of what is an asset for the purposes of the SIS Act. Hence, an alternative view that has been put forward is that sub-divided land is, in substance, the same asset as its original title. It is also claimed that if the regulators focus on the technical difference in the property rights before and after sub-division, this could arguably amount to unduly focussing on any rights acquired.

Further to this, the ATO does acknowledge that the is no mischief in sub-dividing property which is the subject of a limited recourse borrowing arrangement, provided the consent of the lender can be obtained and the funds trustee complies with all other superannuation laws (such as ensuring the activities give effect to the funds properly formulated investment strategy).

So given the fact that a DIY Superannuation fund trustee cannot use the replacement assets provision (it is accepted that real estate cannot meet any of the permitted replacement assets in section 67B, which are limited to certain shares and units) the key questions is:

Does sub-division of land creates a new or different asset in the first place ?

The ATO response

In the September NTLG Super sub committee meeting, the ATO provided its response to the above issue:

A single title to land which has been purchased under a limited recourse borrowing arrangement entered into on or after 7 July 2010 if sub-divided while the loan is still being repaid and while the land continues to be held on trust in the arrangement would cause a contravention of subsection 67(1) of the SISA in respect of the maintenance of the borrowing.

So there you have it. No subdivision of a single title of land under an existing SMSF limited recourse borrowing arrangement entered into on or after 7 July 2010.