Tax ruling change could have ‘adverse’ impact on LRBAs

With a tax ruling in the works to assist taxpayers in understanding the terms “alteration, extension or improvement” of a property, one industry lawyer is lobbying the ATO to be wary of the potentially detrimental impacts on LRBAs if these definitions are further narrowed.

Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said the ATO is conducting a consultation with the industry regarding a proposed income tax ruling to help define the meaning of “alteration, extension or improvement” as it appears in division 43 of the Income Tax Assessment Act 1997.

Mr Butler said that if the new ruling by the ATO further narrows the definition of what is a property, it could potentially bring further limitation for SMSFs with LRBAs.

At the moment under SMSFR 2012/1, Mr Butler said an SMSF trustee can only borrow for a single acquirable asset.

This means that if there are other items separate to the property, such as a detached air-conditioner, this would be classed as a separate asset and the SMSF could not borrow for this, he explained.

“However, if the SMSF has money, it [is allowed] to spend on improvements,” he said.

“It gives an example [in SMSFR 2012/1], that if you have acquired a house, put on a garage, a swimming pool or a second storey extension, these are improvements but they won’t change the nature of the asset.”

Mr Butler said it will be important to see if the ATO is looking at the definition of what is an improvement, extension or alteration, and what impact this might have on an LRBA.

“It will be interesting to see whether they get into the concept of what is a replacement asset,” he said.

A narrower definition, he said, may affect whether the property is deemed as a “single acquirable asset” if it has additions such as equipment.

“[The ATO] could say 'it’s not a single acquirable asset, you’ve acquired some goods and chattels, therefore, it’s not a legitimate borrowing, therefore you have contravened',” said Mr Butler.

“At the moment, the ruling says you can buy a house [and] put in a swimming pool, put in a garage, put in a second storey extension and you haven’t replaced it. So it will be interesting to see if their new ruling brings any further limitation or expansion for SMSFs.”

Mr Butler urged anyone with an interest to make a submission to the consultation “to support the interests of SMSFs and ensure they’re not adversely affected”.

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