SMSFs given leeway on property assets
Wednesday, 14 September 2011 12:35pm

Self managed super fund trustees will be allowed to make improvements to property assets under a proposed new ruling from the Australian Taxation Office, which has also relaxed its interpretation of single acquirable assets.

The ATO's draft ruling on the subject has been endorsed by the Self Managed Super Fund Professionals Association (SPAA), which, it said, would allow investors and their advisers to plan with more confidence.

"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," said Peter Burgess, national technical director, SPAA.

"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," he said.

The ATO now accepts that a property existing on multiple titles can still count as a single acquirable asset, providing its physical characteristics identify it as a single asset and the titles cannot be managed or sold separately.

Under previous rules, funds borrowed under limited recourse borrowing arrangements (LRBA) put in place on or after July 7, 2010, could only be used to obtain a single acquirable asset such as a property on a single title.

In another reversal of rules, the ATO suggests it would now allow improvements on an asset acquired under an LRBA entered into on or after July 7, 2010.

The draft ruling says that a property can be improved using the cash reserves within the SMSF or another source of funding, as long as the improvement does not fundamentally change the character of the asset and is not funded by borrowings.

Borrowings from an LRBA may be used to repair or maintain the acquirable asset but not to improve it, while an SMSF could use insurance proceeds to rebuild a property destroyed by a naturally disaster as long as its fundamental character is unchanged.

"The ATO has made it clear in the draft ruling that they have no intention of being overly pedantic when it comes to the distinction between a repair and an improvement," said Burgess.

"Minor or trifling increases in functional efficiency or value as compared with the acquirable asset as a whole will not amount to an improvement."

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