Repair v improvement in a SMSF property asset

On 14 September 2011, the ATO issued a draft SMSF ruling 2011/D1 setting out the boundaries applying to a limited recourse borrowing arrangement (LRBA) for purposes of maintaining and/or repairing the SMSF’s real property investment as opposed to improving the real property which is not allowed under the current draft ruling.

The money borrowed under the LBRA and secured by the real property asset may NOW be applied to not only acquiring the asset but also repairing and maintaining asset now or in the future.

However, no amount that has been borrowed by the SMSF trustee under the LRBA may be applied to improve the asset.

If the borrowings are applied to improve the asset; the borrowings will contravene S67 of the SIS Act. This means the SMSF will be at risk to be deemed to be a non-complying fund and therefore the tax concessions normally applied to a SMSF may be revoked by the ATO.

However, other funds apart from the borrowings of the SMSF may be used to improve the asset, if the trustee desires.

The ATO gives clear guidelines and examples as to the meaning of the three important terminologies under the rule which are summarised below:

ALLOWED

Maintaining

Means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration provided that it merely ensures the functional efficiency of the asset is maintained in its present state.

Repairing

A repair restores the functional efficiency of the asset without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces part of something or corrects something that is already there and has become worn out or dilapidated through ordinary wear and tear, or is damaged whether accidentally or deliberately or by natural causes.

NOT ALLOWED

Improving

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 or rights orbringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do.

EXAMPLES

A fire damages a part of the kitchen (cook top, benches, walls and ceiling). Restoration of the damaged part of the kitchen would constitute repair of what is a subsidiary part of the asset being the house and land.

The guttering on the house is replaced and the house is repainted. A fence is replaced. A fire alarm is installed to comply with new council requirements. This would be repair or maintenance.

If the kitchen was also extended by extension of the house this extension would be an improvement.

The addition of a new pool or a new garage would be an improvement.

A cyclone damages the roof of the house. Replacement of the roof in its entirety is a repair.

The addition of a second storey to the house at the time of also replacing the roof would be an improvement.

Taxpayer Risk Management
Tax updates 18 October 2011

About Author

Azure Group
Azure Group

Azure Group is the leading Chartered Accounting, Business Advisory and Strategic Advisory firm supporting the growth & success of fast growing entrepreneurial businesses.

Related Posts
Steps to setting up Self-Managed Superfund (SMSF)
Steps to setting up Self-Managed Superfund (SMSF)
Beginners guide to Self-Managed Superfunds (SMSFs)
Beginners guide to Self-Managed Superfunds (SMSFs)
Why Accurate SMSF Record-Keeping is Super Important
Why Accurate SMSF Record-Keeping is Super Important

Comment

Subscribe To Blog

Subscribe to Email Updates