On 23 May 2012, the ATO released SMSFR 2012/1 confirming its
position on the application of a number of key concepts for limited
recourse borrowing arrangements by trustees of self-managed
superannuation funds (SMSFs).
The final ruling largely confirms the draft ruling (SMSFR
2011/D1), as well as providing some useful further detail and
The ruling applies to arrangements entered into on, or after, 7
July 2010 (the commencement of the current borrowing rules).
'Single acquirable asset'
The ATO restates its position in the draft ruling about what is
a 'single acquirable asset' and also introduces a new
factor that requires a unifying physical object (such as fixture
attached to the land) that is:
permanent in nature and not easily removed; and
significant in value relative to the value of the asset.
The ATO also demonstrates that circumstances that may indicate
there is not a single acquirable asset include:
where the object is temporary in nature or otherwise able to be
relocated or removed relatively easily;
a business being conducted on two or more titles;
assets being acquired under a single contract because the
vendor or the lender wants to deal with the assets as a package;
where the asset is not significant in value relative to the
value of the land (new factor).
For example, two adjacent blocks of land that can be sold
separately (i.e. no physical or legal impediments) are not a single
acquirable asset and a separate borrowing trust must be used to
acquire each block.
However, if a factory spans three titles, the ATO accepts that
is a single acquirable asset that can be acquired under a single
borrowing arrangement. In addition to this, however, the ATO now
goes on to say that the factory building must not be
'insignificant in value' relative to the value of the land,
which is an additional hurdle.
'Maintaining' or 'repairing' an acquirable
asset as distinguished from 'improving' an asset
The ruling confirms the position in the draft ruling on these
Repairs and maintenance can be funded from borrowings, while an
improvement must be funded from the resources of the fund.
The ruling clarifies the concept of repairing as something
is usually occasional and partial;
merely replaces a part of something already there; or
uses similar or modern equivalent materials to make the
Further, the ruling provides the following examples;
If a fire damages part of a kitchen (cooktop, benches, walls
and ceiling), the addition of a dishwasher would not amount to an
improvement even if the dishwasher was not previously part of the
The addition of a swimming pool, garage or pergola would still
constitute an improvement.
Same asset or different asset
The ruling also clarifies the position in the draft rulings
that, if additions or alterations are made to the asset, those
additions or alterations cannot fundamentally change the character
of the asset so that it results in a different asset being held on
Subdividing land results in a fundamentally different
The construction of a house on vacant land results in the
character of the asset changing from vacant land to residential
Replacing a house with three strata titled units will also be a
fundamental change and create three different assets.
Converting one bedroom of a residential house to a home or
office however will not result in a fundamental
change in the nature of the asset.
The use of terms by the ATO such as 'superior
materials', 'substantial alterations', 'minor and
trifling' and 'broadly comparable' means many of these
arrangements still need to be looked at on a case by case
However, while there is still some aspects that remain
uncertain, the ATO has provided greater clarification on how it
intends to apply these concepts in what is an increasingly popular
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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