ATO SMSF Draft Ruling SMSFR 2011/D1

The ATO today released a new draft SMSF ruling (SMSFR 2011/D1) which seeks to clarify a number of contentious issues involving SMSF limited recourse borrowing arrangements including;

The ruling if and when passed, will allow money borrowed under the borrowing arrangement to not only acquire the acquirable asset but also in carrying out repairs and maintenance to the asset whether necessary at the time of its acquisition or at a later time.

Money borrowed under a borrowing arrangement may not however be applied to the improvement of the asset.

It also brings some clarity around the use of insurance proceeds to rebuild a property destroyed by a naturally disaster as long as its fundamental character is unchanged.

Also in a reversal of rules, the ruling also suggests it would now allow improvements on an asset acquired under a borrowing arrangement entered into on or after July 7, 2010 so long as it used it’s own cash reserves (not borrowed), and as long as the improvement does not fundamentally change the character of the asset.

The ATO also 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.
 
Interesting. Reading this article from Yardney, he states:

Under the draft plan, the Tax Office will allow members of SMSFs to use their fund (not new borrowings) to carry out improvements on properties.
Self Managed Super Fund members will be able to access their funds for improvements.


However this appears to differ from the ATO ruling which doesn't seem to allow "improvements" at all:

15. No amount that has been borrowed by the SMSF trustees under the LRBA may be applied to improve the single acquirable asset

So my understanding is that the SMSF can't be used for reno's that would improve the functionality, condition, value, etc of the dwelling. Thoughts?
 
Interesting. Reading this article from Yardney, he states:

Under the draft plan, the Tax Office will allow members of SMSFs to use their fund (not new borrowings) to carry out improvements on properties.
Self Managed Super Fund members will be able to access their funds for improvements.


However this appears to differ from the ATO ruling which doesn't seem to allow "improvements" at all:

15. No amount that has been borrowed by the SMSF trustees under the LRBA may be applied to improve the single acquirable asset

So my understanding is that the SMSF can't be used for reno's that would improve the functionality, condition, value, etc of the dwelling. Thoughts?

That's my understanding too.
 

So my understanding is that the SMSF can't be used for reno's that would improve the functionality, condition, value, etc of the dwelling. Thoughts?


The way I read it is that improvements can be funded from the SMSF's own funds (but not borrowed funds) whilst the asset is under a SMSF loan arrangement so long as the changes do not result in a different asset & do not fundamentally alter the character of the asset or the proprietary rights.

Paragragh 36 states "The improvements listed in column 3 of Table 1 at paragraph 27 of this draft Ruling, would not result in a different asset as the changes do not fundamentally alter the character of the asset or the proprietary rights held under the LRBA."

Some of the improvements listed in Table 1 are:

  • Extending a kitchen
  • Adding a pool or new garage
  • Add 2nd storey at the time of replacing the roof
 
Yes an article in Fin Review 17/09 'Property set for makeover' suggests we'll be able to renovate with super funds but not borrowed funds. The draft ruling is open for comment til the end Oct.

So theoretically a strategy could be to buy on 10% down, & renovate during the settlement period. Aim to add 30% value by spending maybe 15%. That would allow you to settle with the required 40% equity while only putting down 25%.
 
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