The ATO have released a draft ruling which addresses some major concerns surrounding the use of limited recourse borrowings by SMSFs. Essentially the following changes have been proposed to commence from 7th July 2010;
- improvements to property will be allowed provided they are not funded from borrowings and do not fundamentally change the nature of the asset
- a single asset may include multiple titles if a single structure is built across all titles.
Since 7th July 2010 the ATO have regarded improvements, not repairs, funded by either a borrowing or other resources as a contravention. Though the prohibition on using loan funds for improvements remains, improvements which are funded from Fund resources or insurance payouts will be allowed provided they do not change the fundamental nature of the asset.
A building cannot be constructed on vacant land acquired under a LRB arrangement as the original asset was the land. The new building would fundamentally change the nature of that asset. The same consideration applies where vacant land is subdivided or a residential property is converted for commercial use. If a building was destroyed by fire and rebuilt using insurance proceeds this would not be a fundamental change to the nature of the asset so is allowable. Similarly a dilapidated unit could be acquired by the Fund using a borrowing then renovated using monies sourced from the Fund.
Previously a building constructed over multiple titles could not be acquired using a single limited recourse borrowing arrangement. The new ATO's view is that the definition of single acquirable asset be expanded from a strict interpretation of title to a more practical consideration involving the building. If the building covers multiple titles and these cannot be separated due to the nature of the building then the definition of single acquirable asset will be satisfied. If the multiple titles involve a farm then it is unlikely that the definition would be met as generally the buildings in such a situation could be separated.
The draft ruling is open for discussion with submissions closing on October 28th but provides a welcome commonsense approach to the more contentious aspects of SMSF borrowing. The ATO is to be applauded for their realistic and commercial approach.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.