A recent draft ruling by the ATO will be good news for investors who hold property in their super fund as it now clarifies some issues allowing SMSF’s to make improvements to existing properties.
Under the draft plan, the Tax Office will allow members of SMSFs to use their fund (not new borrowings) to carry out improvements on properties. Previous ATO regulations restricted SMSFs from using fund from any source to make any changes to properties.
The draft ruling takes a practical approach to the issues that have been raised since July 2010 when the new legislation became effective and means Self Managed Super Fund members will be able to access their funds for improvements, provided they do not make any fundamental changes to the nature of the property and do not access any borrowings.
The ruling has also clarified the use of borrowings for repairs to newly-acquired properties. Once again, the ATO has ruled to allow borrowings for repairs so long as they do not change the fundamental character of the dwelling.
The draft ruling provides helpful examples of what improvements may be allowable but continues with the current interpretation that any change to an asset must not lead to the asset being a different asset (a replacement asset). For example if a four bedroom house with an limited recourse borrowing arrangement is burnt down, the insurance proceeds can be used to build another four bedroom home but not two town houses with two bedrooms each.
Overall the draft ruling provides welcome clarification and practical application of the use of limited recourse borrowings for SMSF trustees.
As this is a complex area of taxation law obviously it’s one where you should seek specialist professional advice.
Pay it safe.
Property investors who use their self-managed super funds to borrow and acquire real estate will need to ensure they fully understand their obligations and comply with the letter of the law, says the Australian Tax Office.
The warning has come from the very top of the industry, with ATO superannuation assistant commissioner Stuart Forsyth saying the forthcoming year will be a “big year” for regulation and compliance.
“We are acquiring new powers to prevent breaches of legislation,” Forsyth said during his keynote speech at the Institute of Chartered Accountants’ National SMSF Conference in Melbourne .
“There will be minimum adverse impacts on people who do the right thing.”
Property investors who set up new DIY funds will receive particularly close attention (about 60,000 new SMSF funds register with the tax office each year), with ignorance of the rules and obligations unlikely to curry much favour with the ATO.
Areas that will receive special focus from the ATO will include breaching contribution caps and illegal early release of funds.
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