New Draft Ruling for SMSF Held Assets -When is a Repair not a Repair?

There has always been a lot of debate about whether superannuation funds could make ‘repairs’ or ‘improvements’ to a property acquired under a borrowing arrangement.  Thankfully, the ATO recently released the Draft Self Managed Superannuation Funds Ruling (SMSFR 2011/D1) which seeks to clarify some of the grey areas on this topic.

The main 3 points clarified in this document are:

  • Definition of a ‘single acquirable asset’
  • What constitutes “maintaining” or ‘repairing’ an asset,  versus an ‘improvement’ to an asset
  • When is an asset a prohibited replacement asset

Generally speaking, it has been our belief the ATO has a preference for investors to hold long term passive investments.  This recent Draft Ruling reinforces that preference, with the Commissioner clearly opposed to property development within the superannuation environment.  The original legislation  was sought to discourage such development within superannuation funds, however in doing so, unintendedly created a blurring of the lines between what is deemed as a ‘repair’ to a property, and what is deemed as an ‘improvement’. Such confusion complicated things for investors who were simply wishing to hold their property as a long term investment.

 

Single Acquirable Asset

It has always been the advice of our solicitors in the past that where two assets were intrinsically linked, and could not be dealt with separately, then this can be deemed as one single asset.  The two common occurrences of two linked assets being recognised as one single asset are:

  • When a property has been constructed across two or more certificates of title
  • When certificates of title cannot be dealt with separately, for example if a real property and its accompanying car park are on separate titles

 

When is an Asset not a Single Acquirable Asset?
The Commissioner’s view is where assets can be dealt with separately and are not intrinsically linked, they will not constitute a single acquirable asset. For example, if a Vendor wants to sell a 10 acre block which consists of 2 titles, they will be recognised as two assets for the purpose of limited recourse borrowing rule, therefore it’s not a single acquirable asset. However, if there was as building on the 10 acres which was positioned across both titles, then the two assets would be intrinsically linked, and therefore it would be recognised as a single acquirable asset.

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