Under this strategy, your SMSF receives a concessionally taxed rent, pays off the loan while you are still working, and transfers the property to you upon retirement.
After your retirement, you can either:
- Take the property as a non-cash, lump-sum benefit (although capital gains tax is payable on any capital profit, the tax rate is an effective 10% – if the property was owned by the fund for at least 12 months); or
- Buy the property from the fund for its market price. No CGT is payable if the property is backing the payment of a superannuation pension, but you are personally liable for stamp duty.
Under limited recourse borrowing rules SMSFs require a separate lending arrangement for each “single asset”.
In May last year, the ATO clarified what constitutes a single acquirable asset and provided a specific example of what constitutes a single asset in relation to a completed apartment: “The trustees of an SMSF enter into a contract to purchase a strata-titled apartment off the plan. A deposit is required upon entering into the contract, with the balance to be paid upon settlement for the completed strata-titled apartment.
“A single LRBA can be entered into to fund both the deposit and the balance to be paid under the contract upon settlement. Both the deposit and the settlement payment are applied for the acquisition of a single acquirable asset being the completed strata-titled apartment.”
According to AMP financial planning, the ruling recognises that “generally speaking, under LBRA rules, the single acquirable asset is considered to be the completed strata-titled unit, or land with a completed house on it – despite the fact that the building activity is yet to occur”.
As a result, where a contract is entered into for a unit off the plan or a house and land package, both the initial deposit and the final payment upon settlement can now be funded by a LRBA.
Previously, under the draft ruling, it had been suggested that the initial deposit for these types of transactions would need to have been made from existing SMSF assets.
Mortgage Choice broker Michelle Towner,who specialises in helping investors acquire apartments off the plan using SMSF borrowing rules, stresses the importance of these investments being structured correctly and that buyers must engage a qualified financial planner, lawyer or accountant to draft up the contracts.
She says the contract needs to be worded correctly so that when the asset is transferred from the bare trust to the super fund, the SMSF beneficiaries don’t risk having to pay double stamp duty.
The bare trust is the arm’s length holding trust that holds the property until the mortgage has been paid off.
In particular, any off the plan contract must be written to say the deposit is for the acquisition or deferred purchase of the property, not just an option or right to buy the property.
Investors will need to work with a professional to ensure the borrowing arrangements are worded and structured correctly.
This article first appeared on Property Observer.