It is possible to buy off-the-plan property in an SMSF; however, if you intend to take out a loan to do so, you will have to establish a bare trust as explained on our property page.
Investment Strategy
Buying off-the-plan property can be risky and Trustees must ensure that this type of investment is allowable and appropriate for their SMSF. One of the risks of purchasing with a mortgage is that if the lender’s final valuation comes in lower than the contracted price, you may be forced to make up the shortfall in your SMSF, which could be an issue if the SMSF does not have sufficient funds.
Points to remember when purchasing off-the-plan with loans in an SMSF:
- The property purchase should be subject to one contract, which must be for the completed house and land. Do not purchase land and then look for an SMSF loan to construct a property on it. You will not be able to use the land as security.
- A custodian Trustee must be in place before the purchase is made so that the contract can be signed with this name.
- Only one property can be added in a bare trust. When purchasing a second property, a new bare trust must be set up. The same custodian trustee can be used for multiple bare trusts.
- Do not borrow to the limit of your SMSF. Make sure you have some liquidity to manage low valuations or the demand for a lower loan-to-valuation ratio from the lender. Alternatively have the capacity and ability to add funds to your SMSF without breaching the contribution caps.
ATO Guidance
For detailed guidance on the issues involved we recommend that you read the ATO’s Taxpayer Alert TA and in the minutes of the NTLG Super Technical sub-group (September 2019).
Next step
When you’re ready, please send us the property details and instruct us to set up the Bare Trust for the SMSF.
Q&A
Can I take-out a loan to purchase an off-the-plan property in an SMSF?
Yes, an SMSF is allowed to use a Limited Recourse Borrowing Arrangment (LRBA) loan as long a it statisfy the rules of the LRBA. An LRBA can only be taken out on a single acquirable asset.
Hence, you need to be mindful that if the off-the-plan purchase includes both land and buildings it should be under one complete contract that includes the full product. If there are two seperate contracts for the land and building, it may not be considered as a single acquirable asset.
Moreover, if an LRBA is taken out you cannot fundamentlly change the nature of the property, so if the initial contract is for vacant land and it has been developed to land and buildings this is a breach of the LRBA rules.
You also need to be mindful that no extras are included in the contract such as furniture, as this will be a breach of the single acquirable asset rule. You can read more about this here.
Can I pay the deposit on the off-the-plan property before entering an LRBA?
Yes, you can use pay the initial deposit on the off-the-plan property prior to entering an LRBA and setting-up a Bare Trust. You will need to get an approval on the loan and set-up the Bare Trust by the settlement date of the property. It would be best if you can get a pre-approval before the settlement.