• Case study scenario 1


    Anita and Nathan purchased an existing commercial property currently being used as a florist under a limited recourse borrowing arrangement (LRBA). They intend to extensively refurbish the property so they can operate an optometrist business. The costs associated with the refurbishment will be met from accumulated funds held inside the SMSF and not from borrowings.

    The refurbishment will not fundamentally change the commercial use of the property and the proprietary rights of the trustees will not change. The asset is still a commercial property providing income to the fund.

    Result

    Under subparagraph 67A(1)(a)(i) of the Superannuation Industry (Supervision) Act 1993 (SISA), borrowings under an LRBA cannot be used to fund improvements. Money from other sources can be used to improve (or repair or maintain) a single acquirable asset. However, any improvements must not result in the acquirable asset becoming a different asset.

    On the basis that there are no significant changes to the nature of the property i.e. it is still used as a commercial property, the improvements will not cause the commercial property to become a different asset.

    How this may affect you

    There are several conditions trustees must comply with that determine whether improvements to a fund’s asset constitute a fundamental change to that asset.

    Where the fundamental nature of the property has changed by the addition to, or fit-out of, the property, it is important to establish if the change has resulted in a different asset.

    In this case, the property would remain as a commercial property with the fit out being the essential difference. As there were no significant changes to the commercial nature of the property, updating the premises from a florist to an optometrist would not cause the commercial property to become a different asset.

    Case study scenario 2

    Fiona and Walter have purchased a residential property under a limited recourse borrowing arrangement (LRBA). They intend to extensively refurbish the property into a clothing shop. The costs associated with the refurbishment will be met from accumulated funds held inside the SMSF and not from borrowings.

    The refurbishment will fundamentally change the residential use of the property. The proprietary rights of the trustees will also be affected as the asset is a non-commercial property that is expected to generate an income to the fund.

    Result

    Under subparagraph 67A(1)(a)(i) of the Superannuation Industry (Supervision) Act 1993 (SISA), borrowings under an LRBA cannot be used to fund improvements. Money from other sources can be used to improve (or repair or maintain) a single acquirable asset. However, any improvements must not result in the acquirable asset becoming a different asset.

    There are significant changes to the nature and use of the property, and fundamentally, the property has become a different asset.

    How this may affect you

    There are several conditions trustees must comply with that determine whether improvements to a fund’s asset constitute a fundamental change to that asset.

    Where the fundamental nature of the property has changed either from residential to commercial or by the addition to, or fit-out of, the property, it is important to establish if the change has resulted in a different asset.

    In this case, the asset is being changed from a residential property to a commercial property. As there are significant changes to the fundamental nature and use of the property, updating the premises in this case would clearly cause the property to become a different asset.

      Last modified: 19 Aug 2015QC 43265