PORTFOLIO Clear outline … DIY super funds must come to grips with the tax rules on assets. Photo: Peter Braig

The strategy: To understand the Tax Office's latest ruling on borrowing by self-managed super funds.

What ruling is that? The Tax Office recently issued a ruling to clear up confusion over what sort of assets self-managed funds are able to purchase and what they can do with them.
The rules state that funds can borrow to buy a ''single acquirable asset'', but just how literally do you take that?
Would a factory built across three different land titles fall foul of the rules?
Or an off-the-plan unit where your deposit buys you, in effect, an option or contractual right to buy the unit?
The law also says that while funds can borrow to maintain or repair the asset, they can't borrow to improve it.
But, again, how strictly should you interpret that? Does it mean you can't do anything to improve the asset at all?
The ruling attempts to clarify these questions with examples used of common occurrences.

So what does it say?
It uses two tests to determine whether something is a single asset.The first is whether there is a unifying physical object, such as a fixture attached to the land, that is permanent, not easily removed and a significant part of the asset's value.
The factory across three land titles is cited as an asset that meets this test. An investment might also be regarded as a single asset if a state or territory law requires the two assets to be dealt with together.
An example cited here is an apartment with a separate car park on the same strata plan that contains a notice of restriction.
While the apartment and car park are on separate titles, the notice of restriction means that if the two are not transferred together, the transfer of title of the apartment cannot be registered. So they form a single asset.
Examples of assets that don't meet the test include a derelict factory on three land titles (as the factory does not form a significant part of the land's value), a farm across two titles where there is no significant impediment to the land being sold seperately, and a serviced apartment with furnishings.

What does it say about improvements?
It is pretty much common sense. Repairs and maintenance keep the asset in its original condition or return it to that state. Improvements significantly alter it for the better. Again, plenty of examples are used for illustration.
For example, if a fire damaged part of a kitchen (cooktop, benches, walls and ceiling), the ruling says it would be acceptable to replace the damaged part of the kitchen with modern equivalent materials or appliances.
If superior materials or appliances were used, it then becomes a question of whether the changes significantly improve the state or function of the asset as a whole. For example, it says, the addition of a dishwasher would not amount to an improvement, even if a dishwasher was not previously part of the kitchen, on the basis that it is a minor or trifling improvement to the kitchen as a whole.

But if you used the opportunity to extend the kitchen, this would be an improvement.

The ruling says you can use non-borrowed funds to improve the investment but you need to take care that the improvements don't lead to it being regarded as a different asset.
So while you could extend a residential property using other funds without falling foul of the rules, the ruling says you would run into problems if you improved it in a way that changed its character - such as turning a residential property into a restaurant or strata-titled units.
The Tax Office's ruling can be found at ato.gov.au.