Buying a property off-the-plan (OTP) typically refers to purchasing a property that is yet to be built.
Trustees of an SMSF may also consider buying a property off-the-plan through the SMSF. There are a number of potential pitfalls that you need to be aware of before undertaking this strategy, particularly when finance will be required:
1. Timing & potential changes
Buying a property OTP can often mean that settlement is more than a year after you initially exchanged contracts on the property. A lot can happen in that time, such as legislative changes, economic downturn, etc. Any of these (and many more) could make it much more difficult to obtain finance than was initially expected, putting you at risk of losing your deposit or potentially paying higher interest rates than initially expected.
2. The purchaser named on the contract
It is vital to ensure that the correct entity is named as the purchaser on the contract of sale for the property as getting this wrong can have adverse tax consequences.
If the SMSF is going to enter into a limited recourse borrowing arrangement (LRBA) to purchase the property, the arrangement involves the property being held on trust (also known as a bare trust) with the SMSF trustee having a beneficial interest in the property. In this case, it is the trustee of the bare trust (also known as a bare trustee, holding trustee or custodian) that must be named as the purchaser on the contract of sale.
If the SMSF will not be borrowing to acquire the property, then the purchaser named on the contract of sale must be the name of the trustee of the SMSF.
3. Single acquirable asset rule
Under LRBA rules, SMSFs are required to enter a separate limited recourse borrowing arrangement for each ‘single acquirable asset’ that they acquire. If there is more than one ‘acquirable asset’ bundled together, using a single bare trust and single loan would be in breach of superannuation law.
It is common for off-the-plan properties such as apartments to be sold with additional or multiple car spaces that might be held on separate titles. This scenario has the potential to cause some issues in relation to the ‘single acquirable asset’ rules.
4. The order of signing documents
Where a LRBA is being used to purchase an OTP property, it is important to confirm the exact order of signing of the bare trust deed documents as this can vary between states. In most states and territories, the bare trust deed is signed after the contract of sale is exchanged and is usually executed close to settlement, but this is not the case everywhere.
5. LRBA balance added to total superannuation balance
From 1 July 2018, when an SMSF enters into a LRBA, a portion of the outstanding balance of the loan will be added to the member’s Total Superannuation Balance where the member has satisfied a full condition of release, or where the lender is a related party of the SMSF. This is important to note because a member’s Total Superannuation Balance affects their ability to make non-concessional contributions to super. Once a member’s total superannuation balance reaches or exceeds $1.6 million as at 30 June of the previous financial year ($1.7 million from 1 July 2021), they will be prohibited from making non-concessional contributions to super. This could have a significant impact on the future cash flow needs of the SMSF.
If you would like to discuss this further with one of our superannuation specialists, please contact the Superannuation team.