ATO Makes Life Difficult for Renovators Using A SMSF
The ATO has finalised its draft ruling on what a SMSF can borrow for and what it can do with assets that are held as security for SMSF borrowings on 23rd May 2012. The final ruling is SMSFR 2012/1. The two main points are that you cannot fundamentally change the character of a property that is security for a SMSF limited recourse loan and you can only borrow for repairs when the property being repaired is security for a SMSF limited recourse loan:
1) An asset that is held as security for SMSF borrowings cannot be fundamentally changed,
2) Borrowings cannot be undertaken to improve an asset
3) Borrowings cannot be undertaken to repair an asset that is not the security for the borrowing and of course you can’t mortgage an asset already owned by the SMSF
4) Each borrowing arrangement must be for an individual asset.
Between the draft and final ruling there appears to be a change in the definition of repair. The draft stated that a “repair” can restore the property to its original condition even though it needed the repair when acquired. The final ruling in paragraph 22 only states that work that “restores the function of the asset to what it was at the time it was acquired, and uses similar or equivalent materials, is a repair”. Paragraph 26 appears to tone this down a little to say it is ok to borrow to undertake repairs that needed doing when you purchased the property.
Then at paragraph 27 it says the greater the state of deterioration at the time of acquisition the more likely it will not be considered a repair but an improvement. This puts renovators in an uncertain position, due to the severe penalties for non complying funds we recommend that they apply for an ATO ruling for each renovation project if it involves borrowing money to undertake the “repairs”. Renovators also need to take care not to improve the property too much.
You cannot fundamentally change a property that is security for a loan. The final ruling gives a more detailed list of what would be going so far as to change a property.
While you can’t borrow for the following you can do these to an asset that is security for a SMSF loan: (a) extend to add two bedrooms (b) put in a swimming pool (c) add a shed, garage or outdoor entertaining area (d) put in a self contained grant flat providing it is not a separate title Of course a property development is a fundamental change to a property so you cannot borrow to undertake a development or to buy a property you are going to develop.
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