When investing in an SMSF, it’s important to know the rules before acting on an investment decision.
Many people who have chosen to invest in property have discovered breaking the rules can be even more costly than investing in an under-performing asset.
Here we examine the Single Acquirable Asset Rule, a complex legal requirement that continues to catch investors in its net.
What is a single acquirable asset?
The rule is further complicated by the fact that a single acquirable asset is not defined within the Superannuation Industry (Supervision) Act 1993. Yet, subsection 67A (1) of the Act applies to limited recourse borrowing and stipulates the need for the loan to apply to a single acquirable asset only.
In order to clarify the position, the ATO has produced draft ruling SMSF 2011/D1 which seeks to determine the exact nature of a single acquirable asset:
“… it may be possible to conclude that a trustee is acquiring a single acquirable asset in the sense that the trustee is acquiring a single object of property notwithstanding that it is comprised of two or more proprietary rights. However, this will only be so where it is reasonable to conclude that the object of the separate proprietary rights, is distinctly identifiable as a single object”
As if this isn’t complicated enough, the ATO presents an example of a factory complex as being a single acquirable asset, even though it comprises perhaps three buildings with separate title deeds – on the basis that it cannot be considered able to be split (because it is bought as a single entity).
One defining characteristic that the ATO uses to define a single acquirable asset – for those who wish to invest in property – is its physical indictors of being a permanent structure. For example, a property’s foundations and connection to water and electricity may define it as a permanent an d single structure.
When does the Single Acquirable Asset Rule apply?
The first principle to understand is that the rule applies to those who wish to benefit from a limited recourse borrowing arrangement (LRBA).
Recently, we’ve had several clients approach us for SMSF property services advice having fallen foul of the rule. One wanted to buy a farm into their SMSF. The farm had multiple title deeds, even though it was to be sold as a single entity. Effectively, once the sale had gone through the client could split the property and sell it off in bits, according to each individual deed. Even though the client wanted a single loan to cover the purchase, the way the property is titled means they can’t complete – at least not within their SMSF structure. In law, this wouldn’t be considered a single asset, but multiple assets sold simultaneously.
Another client wanted to purchase a property into their SMSF which was bought with furniture included. The contract of sale clearly states the whole as being in multiple assets, though the client’s solicitor had (mistakenly) given the purchase its stamp of approval; not realising the purchase was to invest in property within an SMSF.
These two examples highlight the overriding evidence required to comply with the Single Acquirable Asset Rule:
An Asset Cannot Be Split Upon Sale
When buying an asset, it must be considered as unable to split upon a further sale.
For example, an investor who wishes to invest in property where its car parking space is on a separate lot should check paperwork carefully: it would naturally be assumed to be a separate asset, unless a legal restriction applies to prevent the two lots being sold separately. Such resale potential prevents the asset from being considered as a single asset under the rule.
Take advice before entering into contract
Given the above real life examples, the law that dictates the Single Acquirable Asset Rule, and the ATO’s ruling, it can be seen that:
- a purchase with a single deed could be considered as a purchase of multiple assets
- a purchase with multiple deeds could be considered as a single asset
The legal basis of ascertaining whether or not an asset is a single acquirable asset is complex. However, one piece of law that is not complex is that once the trustee has agreed an unconditional contract to invest in property, any recourse to unwind or solve the problem is limited. If the purchase then goes ahead within the SMSF, the SMSF will become non-complying with the potential costly penalties of non-compliance enforced by the ATO (including the winding-up of the SMSF).
To ensure you don’t fall foul of the Single Acquirable Asset Rule, ensure you speak to an SMSF property services specialist before you enter into an unconditional contract to invest in property.