ATO ruling raises questions around SMSF property improvements
A new private binding ruling (PBR) from the ATO has indicated that improvements to a property owned by an SMSF are not counted as a contribution if there is an arm’s length commercial arrangement in place, creating further questions around the tax treatment of property changes in the wake of the ATO’s draft interpretation of NALE laws.
The ruling, obtained in October concerns the issue of whether the value of improvements made to an asset of an SMSF are considered contributions under section 295-160 of the Income Tax Assessment Act 1997 (Cth), which was previously thought to be the case following a September 2013 meeting of the ATO’s National Tax Liaison Group Superannuation Committee.
The October ruling concerned a commercial property owned by an SMSF, whose unrelated tenant wanted to build a showroom on the property which would “substantially increase the value of the property”. The terms of the lease were such that the tenant was under no obligation to return the property to its original condition upon vacating the property.
While such improvements were usually thought of as contributions, in this case the ATO ruled that “not every increase in the capital of a fund is a super contribution as a person who increases a fund’s capital must have the purpose of benefiting one or more members of the fund”, and the improvements sought by the tenants were purely for the unrelated tenant’s’ business purposes.
Commenting on the ruling, DBA Lawyers director Dan Butler said it indicated that as long as all arrangements around a property improvement were at arm’s length with an unrelated tenant, SMSF trustees could have a reasonable degree of certainty that an improvement wouldn’t necessarily be treated as a contribution.
“While this ruling is only binding on that particular taxpayer and anyone else would need to get their own PBR, if a third party comes along and says I want to build on your land and it’s all commercial, you may not have a contribution,” Mr Butler said.
“The ATO have come to the view that notwithstanding the general rule that anything of value that increases the capital of a fund is a contribution, in this case not everything that increases the capital is a contribution as it must have the specific intention of benefiting the fund’s members.”
Mr Butler said the idea of improvements to property being viewed as a contribution had been thrown into further doubt by the ATO’s recent draft interpretation of changes to NALI (non-arm’s length income) rules, as some taxpayers could be caught in a “double jeopardy” situation of having both the contribution and NALI rules apply to them if they used a related party builder for property improvements.
“The ATO has long held the view that where it is a related party and the builder builds on the land, that (increase in value) is treated as a contribution. That being the case it should not be NALI as the contribution reflects the increase in the fund’s capital value, but that does not appear to be reflected in LCR 2019/D3, as the ATO suggest that it is not only a contribution, it could also be NALI,” he said.
Mr Butler said complications often arose with improvements made to properties owned by SMSFs when parties were seeking to ensure the arrangements were at arm’s length.
“Let’s say it’s your fund and you get an arm’s length builder in, but the trouble is you can’t just leave them to their own devices - you’ve got to project manage them and in doing so will that expose your fund to NALI or NALE?,” he said.
“To minimise risk you may need to engage an arm’s length project manager or architect to say you have outsourced everything and you are not giving any free services.”
Mr Butler added that in the case of the above PBR, the taxpayer should now seek another ruling from the ATO about whether the same facts would be caught under the NALE rules.
