Case Study – Smith Superannuation Fund
- John Smith is the sole member of the Smith Superannuation Fund
- The balance of the SMSF is $1m
- John is interested in using a Limited Recourse Borrowing Agreement (LRBA) to borrow $300k to purchase farmland valued at $1.3m from an unrelated party
- The farmland is split across 4 separate titles, but sold together under one contract of sale
- Farmland is used for primary production purposes with crops, fencing and an irrigation system
Question – Are there any issues with this transaction?
If John was to purchase this farmland using a LRBA, the Smith Superannuation Fund would fail to comply with section 67 of the SIS Act, as the asset would not be classed as a ‘single acquirable asset’.
Broadly speaking, an SMSF can borrow money providing the borrowing is made in line with section 67 of the SIS Act. For an LRBA to comply with s 67, there can only be a ‘single acquirable asset’ or a collection of identical assets (such as a parcel of shares of a particular company purchased in a single buy order) held in a holding trust. Further information about LRBA’s can be found in our previous blog “Limited Recourse Borrowing Arrangements (LRBA) And Safe Harbour Rules – Your Questions Answered”
It is the ATO’s view that where an asset can be dealt with separately (i.e. sold in separate lots), they do not class the asset as a ‘single acquirable asset’. One might argue that the farmland has crops, fences and irrigation that spans over multiple titles, which prohibits the land from being sold separately. However, as per SMSFR 2012/1 Example 3, the ATO has clearly specified that crops do not prohibit titles being dealt with separately and fences and irrigation systems are able to be moved or altered such that the titles either with or without those objects can be dealt with separately.
That being said, if John was to buy farmland that houses a piggery enterprise and has a large shed which lies over multiple titles, and that shed provides significant value relative to the land, then the farmland would be considered a ‘single acquirable asset’ and could be purchased under a LRBA.
The point to take from this is the shed is a permanent fixture which prevents the lots from being physically sold as separate assets.
Suggestions for Smith Superannuation Fund
The trustees could make a non-concessional contribution of $300k into the fund so it has sufficient cash to acquire the farmland (therefore not acquiring it under LRBA).
Taking effect from 1 July 2017, the following factors must be considered when making non-concessional contributions:
- An individual will be restricted to contributing additional non-concessional contributions if their total superannuation balance (TSB) exceeds $1.6 million
- An individual’s balance between $1.5 million and $1.6 million can make a contribution or use their bring forward provisions up to the annual NCC cap amount of $100,000. Whilst the 30 June balance may then exceed $1.6 million, the contribution is acceptable.
More information relating to contribution caps can be found in our blog “Changes to the Superannuation Caps From 1 July 2017”
John can purchase the farmland using a LRBA, however, rather than purchasing the farm that is split across four titles under one contract of sale, he could:
- Use the SMSF’s money to purchase some of the titles under one contract of sale (or separate contracts of sale), and;
- Use an LRBA to purchase any remaining titles separately with:
- Separate contracts of sale, AND
- Separate Bare Trustee for each title
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