ATO to go easier on SMSF borrowers

The Australian Taxation Office has adopted a more relaxed stance on the question of how much repair and maintenance is allowed on properties purchased by the trustees of self-managed superannuation funds using borrowed money.

Super fund trustees have only been allowed to gear their asset purchases since 2007 and the rules governing SMSF lending have been tight. The so-called single acquirable asset rule has been a particular problem for trustees.

In a draft ruling issued last week (SMSFR 2011/D1), the ATO indicated that it was prepared to be a little more flexible on the issue.

The money borrowed by a super fund under a limited recourse borrowing arrangement must be used for the acquisition of a single acquirable asset, and it is this asset that must be held in trust so that the trustee can acquire a beneficial interest.

The borrowed money may be used to acquire the asset and carry out repairs and maintenance to the asset. No amount that has been borrowed by the trustees may be applied to improve the single acquirable asset.

Up to now the ATO has taken a hard line in distinguishing between repairs and maintenance and improvements. But in last week's draft ruling it said it was not concerned about minor "increases in the functional efficiency" of the asset resulting from repairs.

According to the draft ruling: "The word maintaining means work done to prevent defects, damage or deterioration of an asset, or work done in anticipation of future damage.

"Repairing means making good defects. Repairs are occasional and partial. They restore the functional efficiency of the asset without changing its character.

"An asset is improved if the functional efficiency of the asset or the value of the asset is substantially increased through the addition of new and substantial features."

The draft ruling sets out to give guidance about whether an asset has been repaired or maintained or whether it has been improved. Reference is made to the asset's qualities and characteristics at the time it was acquired.

Restoration of a kitchen that was damaged by fire would be a repair, whereas an extension of the kitchen would be an improvement.

If a storm damages the roof of a house, replacement of the roof is a repair but the addition of a second storey at the same time would be an improvement.

The ATO would also look at whether the asset changes, so it is no longer the single acquirable asset purchased with the borrowed funds.

Examples of changes to an asset include a subdivision of vacant land, construction of a building on vacant land, demolition and replacement of a house, and rezoning of land.