Gearing and super – New improvement rules
By Alfred Hung | Published: September 15, 2011
In a major breakthrough for Self-managed superannuation funds (SMSFs), the Australian Taxation Office (ATO) has issued a new draft ruling that will make borrowing in super to purchase property much more attractive.
Under the new proposed rules; SMSFs borrowing to buy property will be able to renovate to improve the value of the asset as long as they use money from within the fund, not borrowings, and do not fundamentally change the nature of the asset. This is a change from the previous ruling that stated a SMSF could not use money from any source to improve the property.
This means that SMSFs could use its own money to potentially enhance the value of the property such as upgrading of existing bathrooms, installing a larger kitchen. Borrowing to renovate still remains prohibited.
Other concerns where the ATO have also clarified include:-
Where properties had been damaged by a natural disaster such as a fire or a flood, SMSFs will now be allowed to use borrowings or insurance payouts to rebuild a similar dwelling. In following this line of thought, SMSF’s could also use borrowed funds to pay for repairs on a newly acquired property (i.e. damaged windows) so long as the underlying asset is not substantially changed.
Another area where the ATO has soften its view is the restrictions placed on borrowing to fund a single asset. The ATO now accepts that a property existing on multiple titles can still be counted as a single acquirable asset provided that its physical characteristics identify it as a single asset and the titles cannot be managed or sold seperately.
However, the ATO’s draft ruling reaffirms the regulator’s position against the use of borrowings to buy property for development opportunities.This essentially means that a SMSF cannot use borrowings to purchase land that is subsequently subdivided into multiple titles.
This clarification to the rules mean that SMSFs can now have greater clarity and choice between the types of property that could be purchased under limited recourse borrowing rules. It also allows for better investment decisions without the fear of the ATO cracking down on trustees.
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