Question:
Draft super ruling: borrowed funds to repair property
Answer:
Recent changes are outlined below:
July 1, 2022
- Loss carry back for eligible companies extended to cover 2023 income year.
- Professional firm profits diverted to the professional's spouse or other associates to be reviewed under new Tax Office guidance.
- Corporate collective investment vehicle legislative regime introduced.
- Temporary full expensing of depreciating assets extended to include 2023 income year.
- Depreciable assets of a company joining a tax consolidation group have tax costs setting rules modified for assets depreciated under temporary full expensing rules.
December 9, 2021
- Reduced Pandemic leave disaster payment of $750 per week made available through to 30 June 2022.
August 5, 2021
- COVID-19 Disaster Payments are non-assessable non-exempt income in 2021 income year and later. Payments phasing out as vaccination rates increase.
July 1, 2021
- New Investment Engagement Service launched for businesses planning significant new investments in Australia.
- Tax Office small business independent review service made permanent for businesses with turnover < $10m, for income tax, GST, exercise, luxury car tax, wine equalisation tax and fuel tax credits. Requested before amended assessment issued.
- Small business income tax offset for individuals increased to provide a reduction of 16% for a tax payable up to $1,000.
- Self-managed superannuation funds can now have six members, increased from four members previously.
July 1, 2021
- Some COVID -19 state and territory business grants received by small and medium enterprises are non-assessable, non-exempt income for 2021 and 2022 income years.
- Certain state, territory and local government financial support for individuals and businesses suffering COVID-19 impacts made exempt where businesses have turnover less than $50 million and only in eligible programs.
March 31, 2021
- JobKeeper payments scheme ended.
October 5, 2020
- Boosting apprenticeship commencements subsidy (up to 50% of apprentice's wages) is assessable income.
June 4, 2020
- Homebuilder grant for new home or substantial renovation construction is not subject to income tax.
April 1, 2020
- COVID-19 cash flow boost payments are not subject to income tax
Super funds will now be able to use borrowed funds to repair a property purchased with a limited recourse borrowing arrangement. The Tax office has reversed its position on this in a draft ruling. Further, the super fund can use other monies (not borrowed) to improve the asset provided it doesn’t change its underlying character.
Since a change to the superannuation rules in 2007, self-managed super funds have been able to borrow money on particular limited recourse arrangements to purchase an asset such as business real property or even a residential rental property. Other super rules preclude the purchase from a party related to a member of the super fund if it is not business real property or listed securities such as public company shares. Additionally, super fund assets which are not business real property, cannot be leased to a member or relative.
The Tax Office has previously said that no part of the borrowed funds could be used for repairs or improvements to the property. This draft ruling states:
… [The borrowed monies] may be applied not only in acquiring the acquirable asset but also in carrying out repairs and maintenance to the asset whether necessary at the time of its acquisition or at a later time.
No amount… [of the borrowed monies] may be applied to improve the single acquirable asset… [and]… If the borrowing is maintained the trustee will contravene… [the superannuation rules].
The draft ruling states that the word “repairing” ordinarily means fixing defects or damage, deterioration where the asset has continued use in existence.
“Maintaining” is said to mean preventing defects, damage or deterioration in the anticipation of future problems to ensure the asset is maintained in its present state.
In contrast, an asset is “improved” if the functional efficiency or value is substantially increased with the addition of new features, rights or by making the asset more desirable.
Newer properties, such as those off-theplan, will remain more attractive to SMSFs that need to use borrowings to make the purchase, whereas older properties that need a little renovating are likely to appeal to funds that have enough cash to fund the improvements required said Aaron Dunn, managing director of SMSF Academy.
Financial Review, 14 September 2011, p1, p 14; SMSFR 2011/D1
