New Self Managed Superannuation Fund (SMSF) draft ruling

A new self-managed superannuation fund (SMSF) draft ruling from the Australian Taxation Office (ATO) has relaxed the definition of what constitutes a 'single acquirable asset' within the context of limited recourse borrowing arrangements (LRBAs). The ruling has also given clarity to the distinction between maintaining, repairing or improving an acquirable asset.

Since 7 July 2010, borrowed funds under a LRBA could only be used to obtain a single acquirable asset (such as a property) under a single title.  Where the acquired property was on more than one title multiple LRBA’s would be required. The draft ruling SMSFR 2011/D1 now recognises that a property that exists on multiple titles can  satisfy the definition of a single acquirable asset . 

The following examples in the draft ruling satisfy the definition of a single acquirable asset;

-     A factory or office building on more than one title;
-     Off-the –plan apartments where the borrowing commences upon the property being completed and strata-titles.

The following examples, given in the draft ruling, do not satisfy the definition of a single acquirable asset;

-     Two or more adjacent blocks of land sold together;
-     Farmland with multiple titles;
-     A house built in-situ;
-     Apartment with separate car park (unless titles cannot be assigned or transferred separately);
-     Furnishings required to be purchased with serviced apartments.

The draft ruling also indicates that improvements  and repairs can be made to the acquired assets from monies held in the fund (not borrowings) provided the fundamental character of the asset is not altered. The ruling distinguishes between maintaining, repairing and improving a single acquirable asset.

The following are allowed as improvements without resulting in a different asset:

-     An addition of a new pool or new garage;
-     The addition of a second story on a house , rather than simply replacing a roof;
-     With farmland, additional fencing, dams, bores or tanks were installed;
-     A house burn down by fire and re-built with insurance proceeds

The following are not allowed as they would result in a different asset:

-     Subdividing a vacant block of land;
-     Renovating using borrowings;
-     Developing a vacant block of land;
-     Rezoning of an asset from residential to commercial;
-     A house burnt down by fire but constructed a different type of building;

The draft ruling provides clarity and offers more choice between the types of property that can be purchased under a LRBA. Morrows Legal has been providing advice and documentation to comply with the legislation for LRBA since its introduction in September 2007. The more relaxed draft ruling clearly makes property investment in SMSF more attractive than previously. 

Where the SMSF wishes to borrow funds to purchase property, the Trust Deed must allow for borrowings. Morrows amended their In-House Deed in December 2007 to allow for amended borrowing rules.

The audit of funds undertaking a LRBA is complicated as the requirements  of S.67(A) or 67(B) are specific and purchase in the wrong entity or not having the correct documentation will result in a breach . Our specialised audit, and legal teams are happy to assist you with any of the changes, Deed amendments, audit issues or any other queries.

Should you wish to view the entire draft ruling, please click here.

Contact our office Maureen Allen         03 9690 5700 or mallen@morrows.com.au
                                 Murray Coulthard    03 9690 5700 or mcoulthard@morrows.com.au