ATO ruling specifies allowable repairs and renovations for SMSF property investors

Property investors who borrow through their self-managed super funds to acquire a property will be allowed to undertake some improvements following the release of a final ruling by Tax Commissioner Michael D'Ascenzo. 

The new ruling clarifies what constitutes an allowable repair or maintenance of a property acquired by a SMSF under limited recourse borrowing rules. 

Under the ruling SMSF investors would be allowed to extend their property; add a swimming pool; extend an outdoor entertainment area; and add a garage shed and driveway without breaching borrowing rules. 

“While each of the following changes would be improvements each (or all) of the changes would not result in a different asset,” says the ATO. 

Under 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 guideline resulted in much industry concerns about the guidelines resulting in a draft ruling in September last year and the final ruling issued yesterday by D'Ascenzo. 

The final ruling distinguishes between repairs as “something that reinstates the function of the asset compared with an improvement that improves the asset,” says Andrea Slattery of industry body the SMSF Professionals' Association of Australia (SPAA). 

“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,” she says. 

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,” says the ATO. 

Another example the ATO gives is of a residential house that is converted into a restaurant by renovations that include fitting out a fully functioning commercial kitchen. 

“As a result of the renovation the character of the asset has fundamentally changed from residential premises to restaurant premises. This is a different asset,” says the ATO.

The 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 results in the existing property title being replaced, the minor extent of the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights but also the object of those proprietary rights, remains that of being the residential property.

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Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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