The ruling addresses two key issues:
- what is a single acquirable asset
- repairing versus improving an asset
The guidance is essential to ensure that trustees understand the limited recourse borrowing arrangement requirements. If an arrangement does not meet these requirements, it contravenes the borrowing prohibition and places at risk the SMSF's status as a complying super fund.
The key concepts are:
- what is an 'acquirable asset' and a 'single acquirable asset'
- distinguishing 'maintaining' or 'repairing' the acquirable asset from 'improving' it
- when a single acquirable asset is changed to such an extent that it is a different (replacement) asset
An SMSF can borrow money to acquire a single acquirable asset that is held on separate trust under a limited recourse borrowing arrangement. Multiple assets cannot be held under the arrangement. It is necessary to consider both proprietary rights and the object of those proprietary rights to determine if the asset is distinctly identifiable as a single object, even if it has two or more separate proprietary rights. For example, a factory built across two titles would be a single acquirable asset.
As the money borrowed can also be used to repair or maintain, but not improve, the single acquirable asset:
- an improvement substantially increases the value or functional efficiency of the asset
- a repair corrects something that is already there and that is damaged, has become worn out or dilapidated, or has deteriorated
- maintenance is preventative.
Borrowed money cannot be used to effect improvements. However, money from other sources can be used so long as the changes or improvements to the asset do not result in a different (replacement) asset. If a house is destroyed and another house is constructed from the insurance proceeds (so restoring the acquirable asset to land and a house) this would not result in a replacement asset. Thus the limited recourse borrowing arrangement can continue to operate.
Each draw-down (for example, for repairs) under a limited recourse borrowing arrangement is a separate borrowing but satisfies the limited recourse borrowing arrangement provisions as long as the arrangement as a whole satisfies the provisions. However, borrowings solely to fund repairs to an asset that the SMSF already owns would not satisfy the limited recourse borrowing arrangement provisions.
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