Last week’s Bulletin was timely for me.  I’m looking to make another investment for my SMSF and want to know if it is possible for my SMSF to get a loan to buy an off-the-plan unit or a ‘house and land package’?

Richard, Platinum Member, Victoria

With the way the property market is at the moment, there are some great deals for house and land packages that throw in heaps of extras including landscaping, fencing and furniture, making it really tempting to sign-up.  Off-the-plan developments also make it really attractive to sign up now and (hopefully) reap the benefit of capital appreciation by the time the development is finished.

There is no problem buying these types of assets if there is enough money in the SMSF to totally fund it. 

It gets more complex if you are looking to borrow money for it.  As most SMSF trustees know, there is now no longer a blanket ban on SMSFs borrowing money for investments.  But, as with all things ‘SMSF’ there are heaps of rules around what you can and can’t do and pretty serious consequences for getting it wrong.

Up until recently, the rules did not allow SMSFs to borrow for either of these types of investments under a single Limited Recourse Borrowing Arrangement (LRBA). 

Before we go into more detail about what’s changed, it’s useful to recap on what a Limited Recourse Borrowing Arrangement is.

A LRBA allows your SMSF (through you as their trustee) to take out a loan to buy a single asset.  The investment returns from the asset go into the SMSF.  The asset itself is held in a separate trust so that if something goes wrong and the loan defaults, the lender doesn’t have access to other assets in the super fund. 

Limited Recourse Borrowing has been allowed since mid 2010, but it must be expressly permitted in your SMSF Deed.  If you have a Deed older than this, it will need to be updated to allow for it.  Update your deed now – SMSF Deed Update.

So, what’s different now?

In some rare good news from the Tax Office it appears that your fund is now able to borrow for these types of investments.  The Tax Office issued their final ruling, SMSFR 2012/1, on how key concepts within LRBAs apply.

It is now possible for an SMSF to buy an off-the-plan development with both the deposit and the balance payable on completion under a single LRBA.  Previously, the deposit had to be paid out of the SMSF fund and the balance borrowed at the time of completion.  As always, there are some restrictions.  Platinum readers read on.

It is also now possible to fund the total purchase of a house and land package under a single LRBA.  Previously it wasn’t possible because, although purchased as a package, the building of a house on the land significantly changed the nature of the asset!  The change was from vacant land to residential premises.  In a practical decision, both the deposit and the balance to be paid on completion can now fall under a single LRBA. 

A word of caution for our Platinum members.

When does this apply from?

The Tax Commissioner has turned back time and has made the changes effective from any arrangements entered into from 7 July 2010 – that is from the time LRBAs were introduced. 

Thinking about limited recourse loans or anything to do with SMSFs? Call our resident guru, Tim Pepper at Civic Legal on (08) 9460 5019.

• Self Managed Superannuation Fund Deed
• SMSF – Deed Update
• SMSF – Minute to Appoint Administrator
• SMSF – Minute to Appoint an Auditor
• SMSF – Minute to Approve Financial Statements
• SMSF – Minute to Insure the Members
• SMSF – Revert to Accumulation Phase
• SMSF – Update Trustees and members
• Investment Strategy for SMSF
• Pension Pack
• Product Disclosure Statement

• Issue 412:  SMSFs beware:  It’s only partly your money
• Issue 411:  Protect your company from your employees
• Issue 410:  The risky business of employment contracts
• Issue 409:  Who do you trust?  Choose your enduring Power of Attorney while you still can
• Issue 408:  Will you add it to your EOFY checklist?
• Issue 407:  Leasing business real property from SMSF

Thank you to everyone who has requested a simple document to update their family trust to comply with the latest streaming (and Bamford) rules. This document is now available from LawCentral and is called Family Trust - Streaming & Bamford Update.

The Family Trust - Streaming & Bamford Update document updates your existing family trust deed to add:

• A new income equalisation clause
• New Capital Gains Streaming Provisions
• New Franked Dividends Streaming Provisions
• Allows for attribution of profits
• Loss recoupment provisions

Why update?

If your trust has capital gains or franked dividends, then most older deeds run the risk of failing to deal with this in accordance with the new streaming rules. This can result in beneficiaries being taxed on more income than they actually receive.

Avoid the extra tax and ensure that your trust deed is fully compliant by 30 June.