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I have been asked by an Accountant if the following scenario can happen. Would appreciate some input.
Fund A currently owns a commercial property with a small loan (LRBA). Fund B wishes to buy part of the property but would have to borrow to do so.
Question – can Fund B purchase part of the property? I’m assuming the loan in Fund A would have to be paid out if this went ahead. Can two funds own jointly/tenants in common if one fund borrows for their part of the property.
Hi Faye, if the SIS legislation is followed a SMSF is allowed to sell part of a commercial property to another SMSF and the property could then be held as tenants in common. If the other Fund was a related party then only business real property (eg. commercial property) could be sold to the Fund. However, when there is an LRBA in place on the property it gets more complicated.
The complication is that the Fund's property that has an LRBA has to be a "single acquirable asset" (as per S.67A of SIS). A "single acquirable asset" is an asset that the Fund can acquire the legal ownership of by making one or more payments. This means that the whole property has to be acquirable by a SMSF if there is an LRBA in place. As a result the property could not be jointly owned by 2 SMSF's if either Fund had an LRBA in place over that property (as neither SMSF can acquire the whole asset).
The LRBA rules are complicated so I would recommend the SMSF's get professional advice. As an example, another option would be for the property being owned in a unit trust and each Fund owing units rather than direct property. As the property is already owned by Fund A it may not be practicable for the property to be transferred to a unit trust. This option could be considered if any new properties were to be acquired.
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