One of the key SMSF lending rules is that the property being acquired by the SMSF must be a ‘single acquirable asset’. This simple requirement causes a lot of problems in practice.
The fact that the property being purchased is not a ‘single acquirable asset’ often only becomes evident quite late in the transaction process, and often after the SMSF is contractually bound to purchase the property.
For example, an SMSF decides to buy a home unit with a car space. After contracts are exchanged it is discovered that the car space is on a separate utility lot. This will not pass the ‘single acquirable asset’ test – unless there is a legal restriction preventing the lots from being sold separately. One solution is to have the SMSF purchase the car space for cash and borrow to purchase the unit.
Similarly, an SMSF may contract to purchase a commercial, industrial, or retail property on the basis that the property appears to be a single holding. Later, it is discovered that the property comprises a number of different titles with no unifying feature – for example a valuable structure - tying those titles together.
Unfortunately, once the property trustee has entered into an unconditional contract to purchase the property, there are limited solutions available to enable the sale to proceed in a way which ensures that the SMSF remains complying.
Solutions which involve two or more separate loans are problematic because although the loans can be cross-defaulted, they cannot be cross-collateralised (ie default of one loan can be a default of the others, but if money is lost on the sale of one title it cannot be recovered from the sale of others).
One solution is for the property trustee to go ahead and purchase the property in its own right for the investment to be held outside the SMSF.