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By Larry Schlesinger
Friday, 16 September 2011

The Australian Tax Office, as part of its draft ruling on limited recourse borrowing arrangements (LBRA), has clarified what constitutes an “acquirable asset” or a “single acquirable asset”. It now allows self-managed super funds to acquire properties even if they comprise two or more proprietary rights and has provided 15 examples to help DIY funds grasp what constitutes eligible property borrowing:

Example 1: Two adjacent blocks of land

As part of the SMSF’s investment strategy, the trustees want to acquire two adjacent blocks of land under the one LRBA. The vendor will only sell the two blocks together, however, 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 one LRBA. However, each block could be acquired under a separate LRBA.

Example 2: A factory complex on more than one title

An SMSF trustee wants to enter into an LRBA to acquire a factory. The entire factory covers three separate legal titles.
The factory is a single acquirable asset and can be acquired under one LRBA.

Example 3: Farmland with multiple titles

The trustee of an SMSF wants to enter into an LRBA to acquire a farm. While the farm has been conducted as a single primary production business it comprises two separate titles.

Although only one farming business is conducted on the land, there is no physical or legal impediment to the land represented by the different titles from being dealt with separately. That is, there is no obstacle to part of the farm (one of the titles) being sold off, leaving the farming business to be conducted on the remaining land. As a consequence, the farm is not a single acquirable asset and cannot be acquired under one LRBA.

If, however, the farming business concerned a piggery and the piggery is conducted in a large shed constructed over both titles then, similar to the approach with the factory in Example 2, it would be a single acquirable asset.

The trustees of an SMSF pay an amount to secure the purchase of an apartment ‘off the plan’. This is not the subject of an LRBA. 

Example 4: Completed off-the-plan apartment

Once the apartment is completed and strata titled the trustees are required to complete the purchase. The trustees can enter into an LRBA to facilitate its acquisition as it is a single acquirable asset.

Example 5: House built in situ

An SMSF owns a vacant block of land. The trustees of the SMSF want to enter into an LRBA to construct a house in situ on the block of land.

The house cannot be a single acquirable asset under section 67A. As the house is built in situ it does not exist as an asset separate from the land that can be held on separate trust. Money lent to build a house effectively results in the acquisition of services and building materials and these acquisitions would not satisfy the LRBA requirement that the arrangement involves the acquisition of a single acquirable asset.

Example 6: Apartment with separate car park

The trustee of an SMSF wants to enter into an LRBA to purchase an apartment with a separate car park. The apartment and car park are each on a separate legal title. The laws of the state in which the apartment is located do not allow the two titles to be disposed of separately.

As the two titles cannot be assigned or transferred separately, the apartment together with the car park is a single acquirable asset.

Example 7: Serviced apartment and furnishings

The trustees of an SMSF want to enter into an LRBA to purchase a serviced apartment that will be leased to the provider of short-term residential accommodation. The vendor is an entity associated with the accommodation provider. The purchaser of the apartment is required by the vendor to also purchase a furnishing package.

The apartment without the furnishing package is a single acquirable asset and its acquisition could be funded under an LRBA. However, the apartment and the furnishing package together are not a single acquirable asset. The furnishing package is also not a single acquirable asset as it would include multiple furniture items.

Examples relating to repairs and improvements of assets using borrowings

Example 8: Purchase of land and construction of house using borrowings

An SMSF wants to enter into an LRBA where the single acquirable asset is a vacant block of land. The SMSF intends for the borrowing to provide sufficient funds for the construction of a house on that block.

This arrangement would not satisfy the requirements of section 67A if money borrowed under the LRBA is used to construct the house and thus improve the acquirable asset (the land). Applying money borrowed under the LRBA to improve the asset is contrary to subparagraph 67A(1)(a)(i). Additionally, building a house on the land would result in it no longer being the same acquirable asset.

Example 9: Renovation of property using borrowings

An SMSF enters into an LRBA where the single acquirable asset is a three bedroom residential property. The SMSF renovates the property adding a bathroom using borrowings under the LRBA.

The addition of the bathroom improves the asset as compared with the asset as it was at the time when the LRBA was entered into. The arrangement will no longer satisfy the requirements of section 67A as money borrowed under the LRBA has been applied to improve the asset in contravention of subparagraph 67A(1)(a)(i).

Example 10: Machinery

An SMSF trustee enters into an LRBA where the single acquirable asset is a piece of machinery. Immediately after its acquisition money borrowed under the LRBA is used to fund repairs to the asset to return it to its full functionality.

The arrangement continues to satisfy the requirements of the LRBA provisions.

Examples relating to whether an asset is the same asset or a different asset

Example 11: Subdividing land

The trustees of an SMSF enter into an LRBA to acquire a vacant block of land. Once the LRBA is in place that block of land is subdivided resulting in two separate titles.

The arrangement ceases to satisfy the requirements of the LRBA provisions as the original asset has now been replaced with two different assets and the replacement is not covered by section 67B. As the exception in section 67A ceases to apply to the LRBA, if the borrowing is maintained the trustee will contravene subsection 67(1).

Example 12: 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 over 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 will contravene subsection 67(1).

Example 13: Reconstruction of a house damaged by fire

An SMSF trustee enters into an LRBA where the single acquirable asset is land on which a four bedroom lowset brick house had been constructed prior to the SMSF entering into the arrangement.

The house was severely damaged by fire and the local council required it to be demolished. As a result of an insurance policy, the four bedroom house was reconstructed using the insurance proceeds.

As rebuilding the house is restoring the asset to what it was at the time of entering into the LRBA (that is, a house and land) it does not result in a different asset being held under the LRBA. The arrangement continues to satisfy the requirements of the LRBA provisions.

Example 14: Construction of a different type of building

Assume the same facts as in Example 13, however, insurance proceeds are used to construct two, two bedroom units on the land following approval for dual occupancy.

The construction of the two units on the land fundamentally alters the character of the land and house that existed at the time when the LRBA was entered into. Consequently, the original asset, being the land and the four bedroom house, has been changed to dual occupancy dwellings resulting in a different asset. The exception in section 67A will cease to apply to the LRBA and if the borrowing is maintained the trustee will contravene subsection 67(1).

Example 15: Replacement arising from insurance claim

An SMSF enters into an LRBA where the single acquirable asset is an item of equipment. The item of equipment is subsequently destroyed and a new item of equipment is provided by the insurer as a replacement.

The arrangement ceases to meet the requirements of the LRBA provisions as the item of equipment has been replaced in its entirety and that replacement is not covered by section 67B. If instead a cash payment is made by the insurer to the holding trust, the arrangement would also cease to meet the requirements of LRBA provisions. The exception in section 67A will cease to apply to the LRBA and if the borrowing is maintained the trustee will contravene subsection 67(1).

News – Fifteen ways to add property to your SMSF.