Can you subdivide land you have purchased under a SMSF loan ?
One of the uncertainties in the area of SMSF borrowing that has emerged recently is the issue of whether a single title to land may be sub-divided, where the original single title has been purchased under a SMSF limited recourse borrowing arrangement. This assumes the loan is still being repaid and while the land continues to be held on trust.
For trustees who currently hold vacant land under a limited recourse borrowing arrangement, it’s been a difficult one to resolve. Whilst sub-division did appear to be allowed under the former rules s 67(4A), clarification has been required as to whether the recent changes to the super borrowing laws have altered the position. As you’ll see below, the ATO has now clarified its position.
Firstly, lets understand the problem. If it is deemed that the sub-division lots of the land are in fact a different asset to the original land, then we are probably looking at non-compliance with section 67A(1)(b) to (f) because the features of the arrangement are now no longer in respect of ‘the acquirable asset’. The other problem that emerges is that the in-house assets exemption in section 71(8) will probably also be lost, as the only property of the trust is no longer ‘the acquirable asset’.
If we look at the explanatory memorandum (EM) to the SIS Act in regards to the new sections 67A and 67B which cover limited recourse borrowing arrangements, it states that a series of titles over land that replace a single title over land that has been sub-divided is not a permitted ‘replacement asset’.
Now that initially seems pretty clear cut. However the assumption here is that a land sub-division will create a new and different ‘asset’, and the point is made that there is no discussion in the EM of what is an ‘asset’ for the purposes of the SIS Act. Hence, an alternative view that has been put forward is that sub-divided land is, in substance, the same ‘asset’ as its original title. It is also claimed that if the regulators focus on the technical difference in the property rights before and after sub-division, this could arguably amount to ‘unduly focussing on any rights acquired’.
Further to this, the ATO does acknowledge that the is “no mischief in sub-dividing property which is the subject of a limited recourse borrowing arrangement, provided the consent of the lender can be obtained and the fund’s trustee complies with all other superannuation laws (such as ensuring the activities give effect to the fund’s properly formulated investment strategy).”
So given the fact that a DIY Superannuation fund trustee cannot use the “replacement assets” provision (it is accepted that real estate cannot meet any of the permitted ‘replacement assets’ in section 67B, which are limited to certain shares and units) the key questions is:
Does sub-division of land creates a new or different ‘asset’ in the first place ?
The ATO response
In the September NTLG Super sub committee meeting, the ATO provided its response to the above issue:
“A single title to land which has been purchased under a limited recourse borrowing arrangement entered into on or after 7 July 2010 if sub-divided while the loan is still being repaid and while the land continues to be held on trust in the arrangement would cause a contravention of subsection 67(1) of the SISA in respect of the maintenance of the borrowing.”
So there you have it. No subdivision of a single title of land under an existing SMSF limited recourse borrowing arrangement entered into on or after 7 July 2010.
Kris_Evolved says:
Good article guys!
I have been asked a very similar question recently: Can property purchased under a limited recourse borrowing arrangement (post 7th July 2010) be renovated?
It really comes down to the same question – If an asset is improved does it create a new asset?
I have shared some of my thoughts about this issue in the following article: http://bit.ly/eUf8cJ
Would be interested in hearing some other opinions also.
Thanks!
Kris
November 27th, 2010 at 11:15 pm
Daniel Johnson says:
Interesting read
Could someone try and answer this question.
I have a house which is situated on land which has recently been rezoned to R30 and can be subdivided into a rear lot, Im still paying the bank for this house and we live in it.
Is it possible to set up a SMSF and purchase the rear block at the time of title issue to the SMSF and develope it for investment purposes at market price.
house purchased 2008 ?
Regards
Dan
December 29th, 2011 at 6:47 am