Tax with Max: When you can borrow to buy property

SMSFs borrowing to buy property, commuting account-based pensions, CSHC eligibility, and more.

Summary: In what has been widely regarded as one of the worst pieces of legislation to be passed by federal parliament, it's stipulated that super funds must meet four conditions to borrow to purchase a property. Since 2007 the Australian Taxation Office has had to assist trustees in how to interpret the law by issuing a number of determinations and explanatory memorandum.

Key take-out: Under the ATO’s interpretation of existing legislation, SMSFs can borrow to purchase a property but they cannot borrow to develop or improve it. While other funds can be used to improve or maintain the property, such improvements cannot result in the property becoming a different asset.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

When SMSFs can borrow to buy property

It is my understanding that a SMSF can borrow for residential property purchases but cannot then complete property improvements, such as further development and renovations undertaken by trustees with a view to converting a property to Strata title so it can be sold. Is this correct?

Answer: For a super fund to borrow to purchase a property it must meet four conditions:

  • The asset purchased must be a permissible asset under the superannuation regulations and must fit within the investment strategy of the super fund. This means the super fund’s investment strategy must include the ability to buy direct property and, as long as only commercial property is being purchased from a member and not residential property, the fund can buy any property.
  • The property cannot be directly owned by the SMSF but must instead be held by a custodian known as an instalment trust. The instalment trust requires a trustee, which is preferably a company. The property is held in the name of the trustee of the instalment trust.
  • Before the property can be transferred into the name of the super fund it must make at least one payment. This basically means the SMSF must pay out the loan before it becomes the legal owner.
  • The borrowing taken out to purchase the property must be a non-recourse loan. This type of loan limits the bank or finance company to only having security over the property being purchased and no other assets of the SMSF.

When the legislation was passed allowing SMSFs to borrow it was widely regarded as one of the worst pieces of legislation ever passed by federal parliament. This has meant since 2007 the ATO has tried to assist trustees on how the law is meant to be interpreted by issuing a number of determinations and  explanatory memorandum.

In 2012 the ATO issued advice related to a prohibition on SMSFs borrowing to develop a property. The ATO stated that an SMSF can borrow to purchase a property but they cannot borrow to develop or improve it. An SMSF can, however, use other funds at its disposal to improve, repair and maintain the property. These improvements made cannot result in the property becoming a different asset.

In your question it would appear that the SMSF would be looking to borrow to buy a property that would be improved and then subdivided so that it can be sold. On the basis of the ATO’s interpretation I suspect that they would regard the subdivided property as being a different asset and you could not do this within the limited recourse borrowing rules.

It’s also important to note that the ability to gear inside super may soon disappear, given authorities’ concerns in the sector (see Bruce Brammall’s Renewed threat to SMSF property gearing).

Commuting asset-based pensions

Can you please explain why commuting an account-based pension to a new one would be beneficial? Surely the actual life expectancy when the pension was started would be the same as it is now, and therefore the purchase price would be similar.

Answer: You are right that in some cases a person who stops their account-based pension and starts a new one may not end up with a higher purchase price for their pension, however, depending on the age when the pension was started it can be an advantage even when the value of their superannuation has decreased.

For example, a female who commenced an account based pension at 68 years of age with a balance in the superannuation account of $500,000 and a life expectancy of 19.08 years results in a purchase price for the pension of $26,205.

If that person stopped their account based pension at aged 74 and commenced a new one, their superannuation had decreased in value to $400,000 and their life expectancy at that time would be 14.27 years, resulting in a purchase price of $28,031. That person’s superannuation would need to drop below $373,945 for them to be worse off by stopping their account-based pension and commencing a new one.

CSHC eligibility

Recently I became worried when reading about the eligibility for the Commonwealth Seniors Health Card (CSHC) with respect to my mother who is 91 and still lives independently, but does not qualify for a pension. She has been able to have a CSHC for the past few years. My concern is she received the seniors support supplement in 2013/2014 of $1,220.54 which is non assessable for income tax. If this was added to her existing taxable income it would put her over the $50,000 threshold. Will this non-taxable income be counted under the income test for the CSHC?

Answer: Adjusted taxable income is a term often used by Centrelink when assessing an individual’s entitlement to a range of benefits including family assistance payments, child support, and the CSHC. Thankfully for your mother adjusted taxable income to assess eligibility for the CSHC only includes:

  • taxable income,
  • foreign income,
  • total investment losses,
  • employer-provided fringe benefits, and
  • reportable superannuation contributions

This means that the non-taxable seniors support supplement would not be included and therefore unless her other income exceeds the $50,000 threshold she should still be eligible for the CSHC.

Preserving your part pension

My wife and I receive a part pension, however, we could possibly lose it as our assets are increasing. Can we draw down on our SMSF to fund home maintenance or pay off a current bank debt that is secured by our home deeds without compromising our pension? We want to do this in an effort to legitimately reduce our capital and preserve our part pension.

Answer: If someone wants to maximise their entitlement to the age pension it does not make sense having a home with a mortgage loan. This is because as the value of the home is not counted as an asset any loans secured by the home cannot be used to reduce other investment assets.

In your case it makes a great deal of sense to take a lump sum payout from your SMSF, pay off the loan secured by your home, carry out the home maintenance required and even home improvements. By doing this you will increase the value of your home that is not counted by Centrelink, while at the same time decreasing your superannuation asset which is counted.

Claiming aged care as a medical expense offset

Thank you for your great summary of the aged care rules. It isn't an easy system to understand, and almost impossible if elderly people don't have the support of family or others to assist them through the system. From what I have read you are still able to claim the aged care as a medical expense offset. Could you please confirm this?

Answer: The changes introduced for the 2014 tax year relating to the net medical expenses tax offset have restricted who can claim it. Eligibility for the claim in the 2014 year will depend on whether the tax payer received the offset in the 2012/13 tax return or they paid medical expenses relating to disability aids, attendant care or aged care. This means that aged care expenses can still be used under the net medical expenses tax offset. The ability to claim the net medical expenses tax offset for aged care expenses will cease from July 1, 2019.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

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