SMSFs purchasing property off the plan under a limited recourse borrowing arrangement (LRBA) should seek confirmation any land and buildings are a single acquirable asset to avoid breaching rules for that loan, a technical expert has noted.
Heffron SMSF specialist Sean Johnston pointed out purchasing a single acquirable asset was the first principle of limited recourse borrowings, but this was not always understood by SMSF investors.
“One of the problems, generally, with an off-the-plan purchase, if it is land and a building, they are on two separate contracts,” Johnston said during a webinar hosted by Heffron yesterday.
“If you have two separate contracts you have a problem [with the single acquirable asset rule], but you have also breached another provision, which ties into that rule, and that is you can’t fundamentally change the nature of the property.
“You have gone from vacant land to land and buildings, so you have got a problem there if you have a dual contract.
“I would make sure the solicitor that was doing the conveyancing was aware of the rules and they signed off on the fact this was going to be a compliant arrangement.
“In terms of documentation, it would be a standard LRBA, but the most important part is the contract and the sign-off from the solicitor or the product provider stating they have a compliant product under the Superannuation Industry (Supervision) legislation.
“One thing with some of these purchases is to make sure you don’t throw any extras into that contract. For example, if buying an off-the-plan apartment, don’t get the package that includes the furniture as it will be an additional part of that contract and will also breach the single acquirable asset rules.”
Heffron senior SMSF specialist Annie Dawson added getting a signed document from the solicitor would also avoid future questions in regards to the LRBA and its underlying property.
“I would try to get something from the solicitor upfront as to why they think it’s a single acquirable asset because otherwise it keeps coming up,” Dawson said.
“If you move auditors and have had the property for some years, they will want to review why it’s meeting those rules so it’s worth spending a little bit of time and money upfront to get that in the permanent records.”
