The Two-Part Contract Trap That Catches First-Time SMSF Property Buyers
One of the most dangerous traps in Australian superannuation property investing involves purchasing brand-new builds or house and land packages.
In regular property investing, house and land packages are structured under two distinct contracts: 1) A land contract to buy the vacant lot from the developer; and 2) A separate building contract with a builder to construct the dwelling via progress drawdowns.
If you sign a two-part contract inside an SMSF using an LRBA, you commit a catastrophic, irremediable breach of Section 67A of the SIS Act. An LRBA can only finance a 'Single Acquirable Asset'—it cannot finance vacant land and subsequently fund construction.
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| Contract Type | Structure | Permissible Under LRBA? | ATO Audit Outcome |
|---|---|---|---|
| Completed Turnkey Property | Single contract for land + finished home | ✅ 100% Permissible | Clean Audit Pass |
| Two-Part House & Land Package | Split land contract + separate building contract | ❌ Strictly Prohibited | Breach of s 67A (Severe Penalty) |
| Off-The-Plan Apartment / Townhouse | Single contract with deposit held in trust | ✅ Permissible at Settlement | Clean Audit Pass |
| Multiple Separate Carpark Titles | Apartment on Title A, Carpark on Title B | ⚠️ Requires 2 Separate LRBAs | Audit Flag unless split |
1. What is a 'Single Acquirable Asset' Under Super Law?
The ATO (under SMSFR 2012/1) defines a single acquirable asset as property that is legally unified under a single title deed. If an asset comprises multiple proprietary rights or separate titles that can be sold independently, it cannot be funded under a single LRBA.
For example, buying a commercial unit with three separate storage titles requires either: 1) Three separate Bare Trusts and three separate loans; or 2) Proving that local council covenants legally forbid the titles from being sold separately.
2. The Subdivision and Title Amalgamation Prohibition
While a property is encumbered by an active LRBA, the trustee is strictly prohibited from altering the fundamental character of the asset:
- Subdivisions Prohibited: You cannot subdivide a large backyard into two lots while a loan is active on the title.
- Strata Conversions Prohibited: You cannot convert a block of 4 flats into individual strata titles while under an LRBA.
- Permitted After Loan Payoff: Once the LRBA is fully paid off and the mortgage discharged, the SMSF can subdivide or develop the property (subject to standard super laws).
3. Off-The-Plan High-Density Traps
When purchasing off-the-plan apartments, trustees must verify that the contract of sale includes the apartment, storage cage, and car parking space on a single unified strata title or as accessory lots tied to the main title.
Always have an experienced SMSF conveyancer inspect the draft contract of sale prior to signing.
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David Chi Tran
Emerge Finance
Frequently Asked Questions: Single Acquirable Asset Rule: Avoid Off-the-Plan Two-Part Contract Traps
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