SMSF Borrowing - Is your property a single acquirable asset?

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14
Dec

SMSF Borrowing - Is your property a single acquirable asset?

14.12.15

With the rise in the property market in parts of Australia, limited recourse borrowing arrangements (LRBA) have become a popular loan option for self managed super funds (SMSF’s).  The most common asset purchased by trustees through a LRBA is real property. 

 

Under SMSF borrowing rules, an LRBA may only be used to purchase a “single acquirable asset”.  In some instances the real property may have multiple land titles and each title would need to be held on a separate trust under a separate LRBA.

 

DEFINITION OF A SINGLE ACQUIRABLE ASSET

The term “single acquirable asset” and “acquirable asset” is defined as any form of property, other than money, that the trustee is not otherwise prohibited from acquiring.  The following criteria are used to determine if an asset is a single object of property:

  • the existence of a unifying physical object, such as a fixture attached to the land which is permanent in nature and not easily removed and that is significant in value relative to the value of the asset; or
  •  whether under a law of a State or Territory the two assets must be dealt with together.

 

If there is a physical or legal impediment that prevents the different titles from being sold separately, then the multiple land titles will constitute a single asset.

 

For example, if there are two adjacent blocks of land a vendor wishes to sell together, there are no physical or legal impediments to the two blocks being sold separately.  However a factory that is built over more than one title adds considerable value to the land and thus is a significant part of the asset, meaning the factory is a single acquirable asset and can be acquired under a single LRBA.

 

REPAIRS & MAINTENANCE VERSUS IMPROVEMENTS

Amounts borrowed under an LRBA cannot be applied to ‘improve’ an asset, although maintenance and repairs are acceptable.  ‘Maintenance’ is work that prevents damage or deterioration of an asset to ensure its continued functioning, while ‘repairs’ are work that restores the function of the asset without changing its character. 

 

On the other hand, ‘improvements’ refer to the substantial increase in an asset’s function through substantial alterations, or the addition of further substantial features or rights to the asset or value.  The below table illustrates the difference between repairs and maintenance versus improvements.

 

table2

 

The rules for LRBA’s can be complex and are subject to specific criteria.  If you are uncertain about the above rules or SMSF borrowing in general, please contact ESV on 9283 1666. 

Article by Sylvia Choi