Trap for SMSF borrowings — chattels, goods, LRBAs and SMSFR 2012/1!

If this fridge is also listed in the contract, it could cause a problem

Accordingly, if a super fund trustee wants to borrow to buy two assets, this might well be allowable. However, two limited recourse borrowing arrangements would be necessary: one for each asset.

This is well known. In fact, this is now even a little bit ‘old hat’ where the two items are ‘big ticket’ items such as two titles, even if one of those titles is, for example, a car park title, whereas the other title is an apartment title.

But what happens if there is only one title however the contract of sale also includes certain goods and chattels?

This article explores the ins and outs of SMSF borrowings where chattels are involved.

Background — why conveyancing lawyer tend to add extra items … including the kitchen sink!

As a matter of property law, if someone purchases real estate, included with the real estate are all permanent improvements to the land and buildings. These improvements are known as fixtures.

For example, consider a contract that merely states that the vendor is selling to the purchaser the real estate at 1 Smith Street. Generally, this would automatically also cover all of the following items:

• electrical switchboard
• fixed carpets
• free stand baths and pedestal hand basins
• free standing gas stove
• garden shed and glasshouse
• heating and air conditioning units
• home theater equipment
• hot plates
• taps and showers roses
• telecommunications satellite dish and
• ‘under bench’ dishwasher.

Accordingly, the contract would not need to expressly list the above in order for them to be covered.

However, there are many ambiguous questions when it comes to determining whether an item is affixed to and thus automatically forms part of the real estate.

For example, consider the remote controls for a garage door. Almost by their very definition, they will not be fixed to the property. However, for obvious reasons, a purchaser would definitely want the garage door remote controls!

As a counter example, consider a 52 inch flat screen television that is bolted to the wall. It is (hopefully!) very firmly affixed to the property. However, many purchasers would not expect the television to come with the house.

So, where ambiguities arise, how are these best dealt with? As any property law student can knows, there is a long and tedious jurisprudence on the difference between which items form part of real estate (fixtures) and which don’t (chattels).

In order to avoid a lengthy legalistic debate upon settlement over whether the television (and the frame that was attaching the television to the wall) is a fixture or a chattel, many property lawyers have adopted a very practical approach. When drafting the contract, they expressly specify whether an item is included.

From a property law point of view, this makes complete sense (again, it avoids the nasty fixture versus chattel debate).

But what about from superannuation law point of view?

Strict legal position

Pursuant to s 67A(1)(a) of the Superannuation Industry (Supervision) Act 1993 (Cth), a borrowing must be applied for the acquisition of a ‘single’ asset. The explanatory memorandum that accompanied the Bill that introduced this legislation states:

In the case of the purchase of real property for example, a single title for land and the accompanying house on it would be considered a single acquirable asset, but additional items such as furnishings would not be allowed to be purchased through the same limited recourse borrowing arrangement. Furnishings (or ‘non-fixtures’ of the property) can be acquired through separate limited recourse borrowing arrangements over a single acquirable asset or bought outright (but not held as security under the borrowing arrangement over the property)

Accordingly, the explanatory memorandum takes a very strict position. However, the explanatory memorandum is not the actual law and when interpreting law, there can be some ‘wiggle room’. Under the famous ‘de minimis non curat lex’ principle, the law is not supposed to care about trifles. However, it is untested how far this principle could be used in a limited recourse borrowing arrangement context.

The ATO’s comments in SMSFR 2012/1

The ATO do not expressly tackle the question head on in SMSFR 2012/1. Rather, the closest they get is their example 5:

The trustees of an SMSF want to enter into an LRBA to purchase a serviced apartment that will be leased to a provider of short-term residential accommodation. The purchaser of the apartment is required by the vendor to also purchase a furnishings package.

The apartment without the furnishings package is a single acquirable asset and its acquisition could be funded under an LRBA. However, the apartment and the furnishings package, even if purchased together under the one contract, is not a single acquirable asset. The furnishings package, even if purchased under a separate contract, is still not a single acquirable asset as it would include multiple items

Practically, what to do?

In light of the above, there are several options:

• Option 1 — Check the contract in advance before signing and strike out any references to ‘chattels’, ‘goods’, ‘personalty’, etc. This is the cleanest option from a superannuation law point of view. However, this might be unappealing for many as it involves taking a chance from a property law point of view and hoping that upon settlement the real estate will still have any items that are a little bit ambiguous as to whether they are fixtures or chattel.
• Option 2 — As an add on for option 1, do not just strike out any references to ‘chattels’, etc, but also have a separate contract stipulating that that these are being purchased by the super fund trustee separately (presumably for cash and with no borrowings). Something similar to this approach used to be commonly used in Victoria until the 1980s for reasons of stamp duty (as stamp duty was only charged on the consideration of the sale of the real estate). However, since the stamp duty law was changed, this practice is not at all common.
• Option 3 — the final option is the least clean from a superannuation law point of view, but many find it most practical. Simply have one contract covering the real estate plus any ambiguous items (something generically referred to as ‘inclusions’). To the extent that the super fund trustee reasonably thinks the ambiguous items are chattels, calculate how much of the total purchase price relates to the chattels. Then, be careful to ensure that the chattels are paid from superannuation fund cash and not from borrowed money. (Naturally, this last element can be easier said that done at times.) If embarking on this option, clear documentation is critical.

Conclusion

Advisers need to ‘be on their toes’ when their clients are looking to acquire real estate via SMSFs using limited recourse borrowing arrangements. If the proposed purchase covers more than a ‘single’ asset, timely action is required to ensure compliance with the superannuation law.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.