The Australian Taxation Office (ATO) has issued a draft ruling that has clarified some of the contentious issues regarding limited recourse borrowing arrangements.
One of the key areas SMSFFR 2011/D1 has addressed is the definition of what constitutes an improvement as opposed to a piece of maintenance or repair.
In particular, the draft ruling has provided examples to help advisers and trustees alike determine how certain activities will be viewed.
One illustration the regulator gives is categorising the restoration of a fire-damaged kitchen as part of a self-managed superannuation fund (SMSF) asset as an allowable repair to be funded by borrowings. In addition, it points out if the damaged kitchen in question included an extension when being restored, it would be considered an improvement and cannot be funded through any borrowing arrangements.
The definition of what constitutes a ‘single acquirable asset’ is clarified in SMSFFR 2011/D1. Basically, now an asset can fit under the definition of a ‘single acquirable asset’ even if it exists across multiple titles if these titles are not able to be dealt with or sold separately.
Certain industry commentators have welcomed the tax office’s revised stance on the issues.
“The ATO is now crystal clear on a lot of contentious issues around limited recourse borrowing, which were frustrating both trustees and professionals,” SMSF Academy managing director Aaron Dunn said.
“The draft ruling gives them some much-needed guidance when making decisions around borrowing to invest in property.
“The SMSF industry has been arguing long and loud since changes were introduced from 7 July 2010 that the strict interpretive view taken by the ATO in defining the acquired asset by its legal boundaries was too narrow and that it needed to consider the economic substance of the asset.
“The ATO has not adopted these industry views, however, the draft ruling considers both the legal form and the substance of the asset acquired.”
The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) echoed Dunn’s sentiments.
“We welcome the ATO’s commonsense approach to the interpretation of these rules, which in our view will greatly assist SMSF trustees and their advisers to plan with confidence,” SPAA national technical director Peter Burgess said.
“The single acquirable asset rules and the severe restrictions on asset improvements introduced last year had far-reaching implications on the way assets could be acquired and the number of borrowing arrangements that needed to be in place. This made it very difficult for SMSF trustees and advisers to use the limited recourse borrowing arrangement rules to invest in certain assets to build for their retirement.”
