28/06/2012

On 23 May 2012 the ATO released SMSFR 2012/1.  The ruling interprets and clarifies certain aspects of limited recourse borrowing laws including

• what is an acquirable asset?
• what is the difference between repairs and maintenance as opposed to improvements to the property?
• when do changes to an asset create a replacement asset?

This final ruling followed its earlier draft SMSFR 2011/D1 and for the most part was largely the same as the draft ruling.  However some of the changes in the final ruling from the draft ruling are noted below.

Acquirable Assets
The final ruling introduces the phrase ‘unifying physical object’.  This relates to the issue of multiple titles and whether they can be considered a single acquirable asset.  While the concept was present in the draft ruling this final ruling named and elaborated further up on it. 

A unifying physical object, as the name suggests, is a fixture that effectively means that two parcels of property must be dealt with as one, thereby ‘unifying’ the two parcels.  For example it could be a dwelling that straddles both parcels of land.  It must be a fixture that is permanent, not easily removed and of significant value relative to the value of the asset.  Conversely, a structure which straddles the properties but is temporary in nature, easily removed and or relatively worthless (eg a fence) would not allow multiple titles to be dealt with as a single acquirable asset.

Repairs and Maintenance vs Property Improvements
In relation to whether work conducted falls under repairs and maintenance or property improvements, the draft ruling referred to the ‘functional efficiency’ of the asset and whether there is ‘a substantial increase in the value’, or whether the asset is in a more desirable form as a result of the work. 

To determine these aspects without further parameters would have been difficult, and thankfully these concepts were abandoned and left out of the final ruling.

The final ruling introduces the concept of ‘state or function’ and whether this is significantly altered for the better, compared to the time the asset was acquired.  These are to be considered through the ‘qualities and characteristics’ of the asset, which again are new terms in the final ruling. If the work restores the state or function using similar or modern equivalents it is a repair.
 
The final ruling also clarifies that if the state or function of the asset is only bettered to a ‘minor or trifling extent’ as compared to the asset as a whole that this is not an improvement, but an alteration.

When the Asset becomes a Replacement Asset
The ruling states that while the LRBA is in place activities such as subdivision, building on a vacant block of land, replacement of a house with strata titled units, changing residential premises to commercial premises would all result in the replacement of the original asset by a new and different asset.

However, despite earlier thinking, the final ruling states that some improvements can be made without triggering the replacement asset rules ; such as an extension to add two bedrooms, the addition of a swimming pool, an extension to create an outdoor entertainment area along with other examples.

The ruling contains numerous examples in all areas, so for guidance refer first to those examples.  If you are still in doubt then don’t hesitate to seek our compliance advice on your individual circumstances by contacting Caroline Harley at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.