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New ATO Rulings for SMSF Property Investors – What’s allowed, what’s not? Posted on October 9, 2018

The new ruling simplifies what constitutes an allowable repair or maintenance of a property acquired by a Self Managed Superannuation Fund under limited recourse borrowing rules.

Under the ruling SMSF investors would be allowed to extend their property, by means of adding a swimming pool, extending an outdoor entertainment area, adding a garbage shed and a driveway without breaching the borrowing rules.

The Australian Taxation Office advises that while each of the following changes would be improvements, all of the changes would not result in a separate asset.

Under the previous guidelines issued in July 2010, a renovation was not allowable if the renovation changed the asset so that it was no longer the same asset that was originally purchased.

The final ruling, issued yesterday by D’Ascenzo, distinguishes between repairs as something that reinstates the function of the asset compared with an improvement that improves the asset.

Where the improvement is significant then it is possible the nature and function of the asset that was originally acquired has changed materially to the extent that a new asset has come into existence.

The examples provided in the ruling help to clarify what constitutes a significant improvement.

It makes it clear that the amount borrowed can be used to repair the asset but where there is an improvement the cost must be obtained from other sources, such as the super fund.

Examples include where a ‘granny flat’ is to be constructed in the backyard of a property that already has a four bedroom residence established on it.

The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage.

The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset.

Other examples provided are:

  • A vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.

  • A residential house is built on vacant land which is on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset.

  • A house is demolished following a fire and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets.

  • One bedroom of a residential house is converted to a home office. This would not ordinarily result in a change in the overall character of the asset as a residential house. The conversion of the bedroom into an office does not result in a different asset.

  • Fire destroys a four bedroom house and a new superior residential house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (whether of the same size or larger) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example, would also not change the character of the asset.

  • To allow a road to be widened, a local government authority undertakes the compulsory resumption of a minor portion of the frontage of a property which has a residence on it. While the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights, remains that of being the residential property.

Click here to download a copy of the Self Managed Superannuation Funds Ruling 2012.

If you would like to learn more on property investors and SMSFs, click here to contact us..

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