In the recent ruling by the ATO they have defined the laws regarding taking money from an SMSF to maintain property and purchase property. The regulator clearly defined the boundaries for what they can do in regards to improving properties using an SMSF.
According to the latest ruling SMSF most investors that use gearing can use a variety of measures to borrow money under the prototype loan agreement.
The draft ruling shows us what is permitted by ATO and if you can develop or renovate a propertyb in SMSF
. Trustees involved with gearing property in SMSF need to closely follow the draft ruling.
Geared Assets that Abide by the ATO’s Ruling
Laws recently changed and now SMSF can only borrow for single assets. As a result it is not necessary to have individual borrowing agreements for each asset that is geared. One problem is that it is not easy to know if a building is a single asset or multiple assets. When two properties cannot be separate they will be regarded as a single one. Also included is when the property has more than a single title but is a single asset.
A store that had three tiles would under the ruling of the ATO considered a single asset and would require only one borrowing arrangement. In the event a home and a garage had different titles. According to the ATO the properties cannot be separated when sold. In an SMSF for borrowing purposes these properties constitute only one asset. In the event that an SMSF hope to purchase two pieces of land side by side which the seller want to sell as one. However the lack of reason legally to sell them together means that the ATO will demand different loan agreements for gearing the properties.
ATO’s Interpretation of the distinction between improvements and repairs for properties that are geared
According to last year’s ruling money borrowed according to a limited recourse loan of an SMSF must have the single purpose of maintaining the asset. Improvements are when its efficiency or value has improved. A fund is allowed to use money from it as long as the result is not the creation of an asset that is unique in nature. In the ruling we find out that the ATO’s view in regards to the difference to improvements and repairs for deductions differs from SMSF gearing.
Which improvements result in a different asset?
One difficulty for investors is to know when a property that is geared results in an asset that is different. The new ruling has interpreted that improvements do not in themselves result in the creation of a new asset which differs from previous rulings that concluded that improvements constitute an asset that is unique in nature. The tax office concluded that any cash in the SMSF other than borrowings can be used to to improve the property or to conduct maintenance or repairs. According to s67B improvements cannot turn the acquirable property into a different asset and if undertaken with borrowed money would breach subparagraph 67A(1)(a)(i).
In the event that an SMSF has a house and it is torn down and a six story building is built instead. According to the ruling by the ATO a unique asset is the result of building a new six story building. A geared house is held in an SMSF and property and then rezoned and a condominium is built for rental purposes. Once again this would result in the creation of a completely different asset. You home is destroyed by a fire. The insurance payment is used to replace your home with one of equal value. In this instance since the asset has not been altered fundamentally the proceeds of the insurance can finance the replacement.