The recent Draft Ruling from the ATO is a positive for SMSF trustees considering or already involved in Limited Recourse Borrowing arrangements. Mark Rattigan, Principal of Merideon Wealth Strategies discusses some of the main benefits for investors.

Earlier this month, the Commissioner released SMSFR 2011/D1 which provided more clarity around the "replacement asset" and "single aquireable asset" definitions mentioned in the new SMSF borrowing rules released in July 2010. For a while now there has been concern about improvements to assets under a limited recourse borrowing arrangement, to the point where some advisers were steering away from these arrangements due to the percieved inflexibility.

In the Draft Ruling, the ATO describes what they consider to be repairs and maintenance, and what would be considered an improvement. It states, "Minor or trifling increases in functional efficiency or value as compared with the acquirable asset as a whole will not amount to an improvement".

Repairs and maintenance included rebuilding a similar home in the event of damage or destruction of the existing one, replacing a fence and renovating a kitchen with more modern materials. Rebuilding a different house eg a 2 storey 5 bedroom home being built where a 3 bedroom single story was destroyed would be considered a replacement asset and would still not be acceptable under the arrangements.

The other major development in the ruling is the ability to be able to improve an asset under a LRBA as long as borrowed funds are not used. An improvement that does not create a "replacement asset" will be able to be made as long as funds from "other" sources and no borrowed funds are used. Some examples used in the ruling included renovating a kitchen including an extension, building a garage and installing a pool.

The "single acquirable asset" was also further clarified with the ATO suggesting that an asset that consists of multiple titles but that must be sold as one could be subject to one Limited Recourse borrowing arrangement. This was a concern for commercial and apartment investors previously, with some of the common concerns being a factory built over numerous titles, or an apartment with an attached parking bay that were inseparable. If the Draft Ruling is endorsed, then both of these examples would be possible to purchase under an SMSF gearing arrangement.

For the full ruling visit the ATO website by clicking here.

Mark Rattigan is a specialist SMSF adviser and principal of Merideon Wealth Strategies and regularly presents at seminars on SMSF Borrowing.