On 23 May 2012, the ATO released SMSFR 2012/1 confirming its position on the application of a number of key concepts for limited recourse borrowing arrangements by trustees of self-managed superannuation funds (SMSFs).
The final ruling largely confirms the draft ruling (SMSFR 2011/D1), as well as providing some useful further detail and clarification.
The ruling applies to arrangements entered into on, or after, 7 July 2010 (the commencement of the current borrowing rules).
‘Single acquirable asset’
The ATO restates its position in the draft ruling about what is a ‘single acquirable asset’ and also introduces a new factor that requires a unifying physical object (such as fixture attached to the land) that is:
- permanent in nature and not easily removed; and
- significant in value relative to the value of the asset.
The ATO also demonstrates that circumstances that may indicate there is not a single acquirable asset include:
- where the object is temporary in nature or otherwise able to be relocated or removed relatively easily;
- a business being conducted on two or more titles;
- assets being acquired under a single contract because the vendor or the lender wants to deal with the assets as a package; and
- where the asset is not significant in value relative to the value of the land (new factor).
For example, two adjacent blocks of land that can be sold separately (i.e. no physical or legal impediments) are not a single acquirable asset and a separate borrowing trust must be used to acquire each block.
However, if a factory spans three titles, the ATO accepts that is a single acquirable asset that can be acquired under a single borrowing arrangement. In addition to this, however, the ATO now goes on to say that the factory building must not be ’insignificant in value’ relative to the value of the land, which is an additional hurdle.
‘Maintaining’ or ‘repairing’ an acquirable asset as distinguished from ‘improving’ an asset
The ruling confirms the position in the draft ruling on these concepts.
Repairs and maintenance can be funded from borrowings, while an improvement must be funded from the resources of the fund.
The ruling clarifies the concept of repairing as something that:
- is usually occasional and partial;
- merely replaces a part of something already there; or
- uses similar or modern equivalent materials to make the repair.
Further, the ruling provides the following examples;
- If a fire damages part of a kitchen (cooktop, benches, walls and ceiling), the addition of a dishwasher would not amount to an improvement even if the dishwasher was not previously part of the kitchen.
- The addition of a swimming pool, garage or pergola would still constitute an improvement.
Same asset or different asset
The ruling also clarifies the position in the draft rulings that, if additions or alterations are made to the asset, those additions or alterations cannot fundamentally change the character of the asset so that it results in a different asset being held on trust.
- Subdividing land results in a fundamentally different asset.
- The construction of a house on vacant land results in the character of the asset changing from vacant land to residential premises.
- Replacing a house with three strata titled units will also be a fundamental change and create three different assets.
- Converting one bedroom of a residential house to a home or office however will not result in a fundamental change in the nature of the asset.
The use of terms by the ATO such as ‘superior materials’, ‘substantial alterations’, ‘minor and trifling’ and ‘broadly comparable’ means many of these arrangements still need to be looked at on a case by case basis.
However, while there is still some aspects that remain uncertain, the ATO has provided greater clarification on how it intends to apply these concepts in what is an increasingly popular investment alternative.
If you have any questions regarding this alert, please contact Alex Clifton-Jones or Scott Hay-Bartlem.