Clarity for SMSF property investors as ATO defines ‘single acquirable asset’
Property investors who borrow through their self-managed super funds (SMSF) have received clarity over what constitutes a “single acquirable asset” following the release of a much-anticipated ruling by Tax Commissioner Michael D'Ascenzo.
The final ruling provides 15 examples of what constitutes a single acquirable asset.
Under limited recourse borrowing rules SMSFs require a separate lending arrangement for each “single asset” they acquire.
However, guidelines introduced in July 2010 created confusion among investors and their advisors in instances where they acquired what common sense would suggest would be a single property but over two titles – such as an apartment on one title and the accompanying car park under another title.
The new ruling clarified situations where there may be two separate assets at law but because they are inseparable then they will be treated as a single asset for limited recourse borrowing purposes.
It says that in the above example of an apartment and car park on separate titles, these will be treated as a single acquirable asset and hence will only require one limited recourse borrowing arrangement.
Other examples of what is deemed a single acquirable asset by the ATO include a building such as a factory or farm building that straddles two property titles.
However, an investor acquiring a serviced apartment that also requires the purchase of a furnishing package, even if under one contract, would require two separate borrowing arrangements.
“The commissioner’s interpretation of these terms has provided a common sense and practical solution to legislation that could be read far more strictly,” says SMSF Professionals' Association of Australia chief executive Andrea Slattery.
“It’s encouraging to see the commissioner adopt such an approach, and it will certainly make life much easier for trustees – and their advisors – of self-managed super funds.”
“The issue that arose was around what constituted a single acquirable asset, and with this ruling it has clarified instances where there may be two separate assets at law but, for all practical purposes, are one asset,” she says.
Other examples provided by the ATO include:
Two adjacent blocks of land
As part of the investment strategy of an SMSF, the trustees of the SMSF want to acquire two adjacent blocks of land under a single LRBA. While the vendor will only sell the two blocks together, there are no physical or legal impediments to the two blocks of land being sold separately.
The two blocks of land are not a single acquirable asset. As a result, the two blocks of land cannot be acquired under a single LRBA. However, the blocks of land could be acquired under separate LRBAs.
A factory complex on more than one title
A trustee of an SMSF wants to enter into an LRBA to acquire a factory which is constructed across three titles. The existence of the factory adds considerably to the value of the land and thus is a significant part of the value of the asset. The factory is therefore relevant as a unifying physical object.
The factory and the land comprised of the three titles, is a single acquirable asset and can be acquired under a single LRBA.
However, if the factory was derelict and thus not of significant value relative to the land this asset could not be acquired under a LRBA as the factory is not relevant as a unifying physical object and thus the assets are the three titles.
Purchase of residential premises
The trustees of an SMSF want to acquire land that has an existing residential house on it. A deposit is paid to the vendor on signing the contract to acquire that land with the house. The balance of the purchase price is paid at settlement 60 days later. The relevant asset acquired is the land along with the existing house.
The land with the existing house is a single acquirable asset and the deposit and the payment at settlement is applied for the acquisition of that asset. The trustees of the SMSF can enter into a single LRBA to fund both payments.
Completed 'off-the-plan' apartment
The trustees of an SMSF enter into a contract to purchase a strata titled apartment 'off-the-plan'. A deposit is required upon entering into the contract with the balance to be paid upon settlement for the completed strata titled apartment.
A single LRBA can be entered into to fund both the deposit and the balance to be paid under the contract upon settlement. Both the deposit and the settlement payment are applied for the acquisition of a single acquirable asset being the completed strata titled apartment.
House built over two titles
The trustee of an SMSF enters into an LRBA where the single acquirable asset is a house which is built across two titles. Subsequently the house is relocated so that it stands on only one of the titles.
The arrangement ceases to satisfy the requirements of the LRBA provisions. The relocation of the house results in the asset under the arrangement no longer being a single object of property. Following the relocation there are two separate assets, the block of land with the house and a vacant block of land, that could be dealt with separately. If the borrowing is maintained the trustee of the SMSF will contravene subsection 67(1).
The Self Managed Superannuation Funds Ruling SMSFR 2012/1 is available to be downloaded in full.
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