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SMSFs and limited recourse borrowing arrangements: Draft ATO Ruling SMSFR 2011/D1

This Draft Ruling, released on 14 September 2011, explains the Commissioner's views on key issues about limited recourse borrowing arrangements for Self Managed Superannuation Funds (SMSFs)[1] including:

  • what is an "acquirable asset" and a "single acquirable asset";
  • "maintaining" or "repairing" the acquirable asset (as distinguished from "improving" the asset, which is not allowed); and
  • when a single acquirable asset is changed to such an extent that it is a different asset (which is also not allowed).
Stuart Jones, Thomson Reuters


For an SMSF to borrow money (and maintain a borrowing), the borrowing must be to "acquire" a single "acquirable asset". In addition, if an SMSF borrowing is used to acquire an asset, then that asset can be replaced only with a "replacement asset" according to the circumstances in s 67B.

You can read earlier ClearLaw articles about SMSF borrowing here.

Acquirable asset

An "acquirable asset" is any form of property (other than money) that the SMSF trustee(s) are not otherwise prohibited from acquiring under the superannuation law. Although "property" can include proprietary rights or the physical objects of proprietary rights (eg land), the ATO says it is necessary to consider the meaning of property in both senses to determine whether the money borrowed has been used to acquire a single acquirable asset.

Single acquirable asset

The money the SMSF trustee(s) have borrowed can be applied to acquire only:

  • a single acquirable asset; or
  • a collection of identical assets with the same market value — for example, shares of the same class in the same company acquired at the same price.

However, the Commissioner considers that a single object of property may be acquired even if it is comprised of 2 or more proprietary rights. However, this will only be so if it is reasonable to conclude that the object of the separate proprietary rights is distinctly identifiable as a single asset. If assets can be dealt with separately, then the Commissioner considers them to be more than one asset for the purposes of the SMSF borrowing provisions√?¬≠ — unless other laws of a State or Territory prevent it from being dealt with separately.

The ATO ruling gives the following example of assets that the ATO regards as a "single acquirable asset":

  • 2 adjacent blocks of land;
  • farmland with multiple titles;
  • a factory on more than one title;
  • completed off-the-plan apartments;
  • a new house built on land; and
  • apartments with separate title for a car park, serviced apartments and furnishings.

Borrowings applied for repairs (but not improvements)

To determine if an asset has been repaired or maintained (as opposed to "improved"), the ATO says trustee(s) need to consider the asset's qualities and characteristics at the time the asset is acquired under the SMSF borrowing. To this end, the ATO says an asset is improved if the functional efficiency of the asset (or value) is substantially increased.

The Commissioner also warns that his views on repairs and improvements in Ruling TR 97/23 are informative (but not determinative) in the context of SMSF borrowing.

If an asset is already owned by an SMSF (and is not subject to borrowing), then the Commissioner says a borrowing to pay for repairs to, or maintenance of, that asset would be in breach of the SMSF borrowing provisions.

Repairing the asset

According to the draft ruling, "repairing":

  • means remedying or making good defects in, damage to, or deterioration of, an asset; and
  • contemplates the continued existence of the asset.

The ATO says a repair:

  • is usually occasional and partial work to restore the functional efficiency of the asset without changing its character; and
  • may include restoration to its former appearance, form, state or condition.

That is, a repair merely replaces a part, or corrects a problem, due to something becoming:

  • worn out or dilapidated through ordinary wear and tear; or
  • damaged, whether accidentally or deliberately.

Acquiring asset in need of repair

The draft ruling notes that an asset may be acquired in a defective, damaged, or deteriorated condition so that it is not at its normal level of functional efficiency. Accordingly, the ATO says a restoration of the asset to its functional efficiency would be a repair (and not an improvement) for the purposes of SMSF borrowing.

However, the ATO warns that a substantial renovation of a rundown house would improve the functional efficiency of the asset as well as substantially improve its value. Thus, the ATO says such a renovation would amount to an improvement for which SMSF borrowing could not be used.

Improving the asset

In contrast to a repair, the ATO considers that an asset is improved if the functional efficiency of the asset (or its value) is substantially increased through:

  • adding new and substantial features or rights; or
  • bringing a thing or structure into a more valuable or desirable form, state or condition.

The ATO says this is a question of fact and degree to be determined against the state of the asset at the time the SMSF borrowing was entered into. However, minor or trifling increases in functional efficiency or value will not amount to an improvement.

The Commissioner illustrates the distinction between repairs and improvements with the following (edited) table:

Repairs/maintenance (permitted)

Improvements (not permitted with borrowed money)

Fire damages part of kitchen (cooktop, benches, walls and ceiling). Restoration of damaged part of kitchen constitutes a repair of what is a subsidiary part of the asset (house and land).

If kitchen was also extended by extension of house, this extension would be an improvement.

Guttering on house replaced and house repainted. A fence is replaced. Fire alarm installed to comply with council rules. This would be a repair or maintenance.

Addition of new pool or new garage would be an improvement.

A cyclone damages roof of house. Replacement of roof in its entirety is a repair.

Addition of second storey to house at the time of also replacing roof would be an improvement.

A farm (on a single title) is the single acquirable asset under the SMSF borrowing. At time of entering into the borrowing, the farm includes one set of cattle yards, 4 bores including windmills, tanks, troughs and 3 km of fencing. Replacing a section of the cattle yards or the existing fencing is a repair. Ensuring bores, windmills, tanks and troughs continue working is repair or maintenance. This would include laying new pipes between tank and trough.

Each of the following additions is an improvement: a new set of cattle yards; new bore, tank, windmill and trough; a dam; a further 2 km of fencing.

Although the improvements listed above could be carried out, the SMSF must use its own money (and not borrowed money) for those purposes. According to the Commissioner, these improvements would not fundamentally alter the character of the asset.

The ATO ruling also gives the following example of improvements to assets using borrowings:

  • purchase of land and construction of house using borrowings;
  • renovation of property using borrowings; and
  • machinery.

Drawdowns for repairs

The ATO accepts that later drawdowns under SMSF borrowing may be made for the purposes of maintaining or repairing an asset, as long as the arrangement as a whole continues to satisfy the SMSF borrowing provisions.

Improvements using money not borrowed

Although SMSF borrowings cannot be used to improve a single acquirable asset acquired with borrowed money, the ATO says money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset. Remember that an improvement to an asset using money from other sources may have excess contribution implications for the SMSF members as it will effectively increase the capital of the SMSF, see Ruling TR 2010/1 here.)

Different (replacement) assets

An asset acquired with SMSF borrowing can only be replaced with a "replacement asset" in the circumstances in s 67B. If the acquired asset is changed (including by way of improvements) to such an extent that its character is fundamentally changed and the asset becomes a different asset, then the exception in s 67A (that allows borrowing) will cease to apply. However, the Commissioner says that restoring a house destroyed by fire, flood or cyclone by reconstructing a similar house would result in the restoration of the original acquirable asset rather than its replacement.

The draft ruling sets out the following examples to illustrate when a change to a single acquirable asset results in a different asset:

  • vacant block on single title - a subsequent subdivision will result in multiple titles. One asset has been replaced by several different assets as a result of the subdivision;
  • vacant block on single title - a residential house built on vacant block of land (still single title) will fundamentally change the character of the asset from vacant land to residential premises. This is a different asset;
  • house and land - house is demolished and replaced by 3 strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created 3 different assets;
  • house and land - land is re-zoned and house is renovated to become commercial premises. The character of the asset has fundamentally changed from residential premises to commercial premises. This is a different asset.
  • house and land - 4 bedroom house destroyed by fire and a 4 bedroom house is constructed using insurance proceeds. Rebuilding a 4 bedroom house does not fundamentally change the character of the asset held under the SMSF borrowing. Rebuilding the house restores the asset to a house and land.

The draft ruling also includes these examples of assets being so changed as to become a different asset:

  • subdividing land;
  • house built over 2 titles;
  • reconstruction of house damaged by fire using insurance proceeds;
  • construction of a different type of building; and
  • replacement of machinery arising from insurance claim.

Date of effect

When finalised, the Ruling is proposed to apply to arrangements entered into on or after 7 July 2010 (including an arrangement that is a refinancing of a borrowing of money under an arrangement entered into before, on or after 7 July 2010).


ATO contact: Dennis Bird

Tel: (08) 8208 1157

Fax: (08) 8208 1898


Comments are due by 28 October 2011.

Thomson Reuters comment

Although the draft ruling provides some welcome clarification on the Commissioner's views on key aspects of the SMSF borrowing provisions, it only covers a few pieces of the puzzle.

Given the complexity involved, an SMSF looking to acquire property through borrowing should obtain independent advice in relation to the borrowing agreement and the establishment of the holding trust structure. Such planning will help to ensure that the documentation will substantiate favourable tax treatment and prudential compliance in the years ahead. Severe penalties (and criminal sanctions) can result for breaching the SIS Act, not to mention the transaction costs to unwind a non-compliant structure. Further details on the superannuation borrowing rules exception are outlined in Thomson Reuters' Australian Superannuation Handbook 2011-12 and Australian Financial Planning Handbook 2011-12.

See also the Tax Office's previously published document on its Website, "Limited recourse borrowing arrangements by self-managed super funds - questions and answers".

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

More Cleardocs information on related topics

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[1] Sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act)


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