The introduction of the new borrowing provisions of the SIS Act in July 2010 created confusion for both SMSF members and professionals. Particularly regarding the purchase of property, uncertainty exists surrounding (a) whether a property subject to a LRBA can be repaired, maintained or improved, (b) does an 'off-the-plan' purchase contravene section 67A or 67B of the SIS Act, and (c) the concept of 'single acquirable asset' and 'different asset'.
In response, the ATO recently released Draft Ruling, SMSFR 2011/D1, to address some of these concerns. Outlined below is a summary of the guidance provided in the Draft Ruling relating to the above concerns.
Repairing or Maintaining Property
- Property subject to a LRBA can be repaired and maintained with either borrowed funds or with non-borrowed funds both at the time of its acquisition or at a later date.
- However property already owned by a SMSF, and thus not subject to a LRBA, cannot be repaired or maintained with borrowings.
Improving Property
- Trustees cannot use borrowed monies to improve any asset subject to a LRBA.
- However, money from other sources can be used to improve (or repair/maintain) an asset subject to a LRBA, provided the improvement does not result in a different asset.
Reasons for the above rulings along with guidance on what constitutes a repair or improvement can be found in the Draft Ruling.
Single Acquirable Asset/Different Asset
The Draft Ruling provides a number of examples defining a 'single acquirable asset'. These include buildings on more than one title and land with multiple titles. It also uses the concept of 'single acquirable asset' when providing examples of improvements giving rise to a 'different asset'. The Draft Ruling suggests that an asset would have to exhibit significantly different characteristics to be classed as a 'different asset', and also fail the 'single acquirable asset' test, such as the subdivision of a single block of land resulting in multiple titles, a residential property built on a block of land (including the purchase of a 'house and land' package from a developer), and when a single house and land is demolished and replaced with three strata titled units. Note, rebuilding a house after it has been destroyed by fire with insurance proceeds does not give rise to a different asset.
Off The Plan purchases
Unfortunately the Draft Ruling does not clarify whether the purchase of a 'right' to acquire an apartment 'off-the-plan' is a different asset to the actual property. The only guidance given suggests that trustees wishing to purchase an 'off-the-plan' apartment should:
- Pay a deposit to secure the purchase of an 'off the plan' apartment with fund money; and
- Once the apartment is completed and strata titled the trustees can complete the purchase through entering into a LRBA.
Conclusion
The Draft Ruling provides clear guidance surrounding repairing, maintaining or improving property. It should help trustees who have acquired property later damaged or destroyed by natural disaster, or those who have purchased a 'renovator's delight'. However you are reminded that this is a Draft Ruling only with submissions closing Friday 28 October.
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