This SMSF Ruling, released on Wed 23.5.2012, explains the Commissioner’s views on the limited recourse borrowing arrangement (LRBA) provisions in ss 67A and 67B of the SIS Act.
Broadly, an SMSF is permitted to borrow money provided that the borrowing is made pursuant to an LRBA. An LRBA entered into from 7 July 2010 can only be referable to a single “acquirable asset” held in a holding trust, which the SMSF is not otherwise prohibited from acquiring directly. In addition, a borrowing applied to the original acquirable asset can only be replaced with a “replacement asset” according to s 67B.
The Ruling explains the key concepts of what is a “single acquirable asset”; maintaining or repairing the acquirable asset (as distinguished from improving it); and when a single acquirable asset is changed to such an extent that it is a different (replacement) asset. While borrowings under an LRBA cannot be used to improve an acquirable asset, the Tax Office says money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.
The Ruling was previously issued as Draft Self Managed Superannuation Funds Ruling SMSFR 2011/D1 and has been substantially revised to provide greater clarity on various issues.
For off-the-plan purchases of strata units, the Tax Office accepts that the deposit (and balance payable at settlement) can be funded under a single LRBA. However, it warns than an “option” to purchase off-the-plan must be funded under a separate LRBA to any subsequent acquisition of the house or unit. Additional illustrations set out where a borrowing can be applied to repair (or maintain) an acquirable asset, contrasting prohibited situations, which result in an improvement.
The Final Ruling has revised the 15 Examples from the Draft to provide more details on key issues, including farmland with multiple titles, factory across multiple titles, off-the-plan apartments, apartments with separate title for a car park, serviced apartments, extension of commercial building and replacement of equipment from an insurance claim. The Final Ruling includes 5 new examples (but removed 5 of the previous examples from the Draft, including the one on the subdivision of land).
DATE OF EFFECT: The Ruling applies to arrangements entered into on or after 7 July 2010.
[LTN 98, 23/5]
Winding up an SMSF: when to close bank account?
In its SMSF News (Edition 22), issued on Thur 31.5.2012, the Tax Office has advised trustees in the process of winding up a self-managed superannuation fund (SMSF) that it isn’t mandatory to keep open the fund’s bank account until confirmation of the wind-up is received. Rather, the Tax Office says that an SMSF’s bank account can be closed once all expected final liabilities have been settled.
Nevertheless, the Tax Office considers that a bank account must be maintained if the SMSF is going to receive a tax refund. The net refund amount should then be rolled over from the SMSF’s bank account to the successor complying super fund. The Tax Office says it will not insist on an additional SMSF annual return to cover the rollover of the last transaction caused by a refund. However, it still expects a rollover form to be completed and supplied to the successor fund.
Other topics covered by the Tax Office’s SMSF News include:
- new version of eSAT;
- annual audits of SMSFs;
- proportioning rule;
- illegal early release schemes; and
- GST treatment of new residential premises.
[LTN 104, 31/5]