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Property investors can use limited recourse borrowing (LRBA) to fund off-the-plan investments using their self-managed super funds.
Under this strategy, you can borrow to invest in property using your superannuation balance to purchase property off-the-plan. Developers can be up against it in selling properties off the plan and getting in at the early stages can be quite beneficial for the investor including getting the best price as the first properties available are usually the cheapest and the long settlement period ensures you have time on your side to provide for moving house and obtaining finance.
Direct benefits of for your SMSF are that the SMSF receives a concessionally taxed rent, pays off the loan while you are still working, and transfers the property to you upon retirement.
After you retire, 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 SMSF for its market price. If the property is backing the payment of a superannuation pension, no CGT is payable, but you are personally liable for stamp duty.
Under LRBA rules, SMSFs require a separate lending arrangement for each “single asset”.
Recently, 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.”
Based on the above, “generally” speaking, this can be interpreted that 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. Consequently, 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.
Redwood Advisory, who specialise in property investments through an SMSF, stress the importance of these investments being structured correctly including the contact and the bare trust deed. The bare trust is the arm’s length holding trust that holds the property until the mortgage has been paid off.
Investors will need to work with a professional to ensure the borrowing arrangements are worded and structured correctly.
Ivan Filipovic is a Director of Redwood Advisory – SMSF Specialists, who specialise in property investment in SMSF. Ivan can be contacted on 1300 790 110 or 0425 622 226.
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