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Forward Thinking Magazine : August 2011
28 Macquarie Adviser Services Macquarie Adviser Services Separate holding trusts A further requirement is for a separate holding trust to be established for each ‘acquirable asset’ (including a collection of identical assets) if the holding trust is to be excluded from the operation of the in-house asset rules. The latter is a highly desirable outcome if the assets of the trust amount to more than 5 per cent of the total assets of the super fund. real proper ty More surprisingly, the introduction of the ‘acquirable asset’ concept has led to complications in the direct property area. Discussions at the National Tax Liaison Group – Superannuation Technical subcommittee have highlighted problems with the approach of equating a single asset with one land title. In a situation where, for example, a super fund intends to acquire an apartment with a carparking space that is on a separate title to the apartment, a separate LRBA (including a separate holding trust) must be established. Separate LRBAs would usually lead to registering a separate mortgage over each title, but state legislation may prohibit this in a least one Australian state. For example, in Victoria, if the title to the carparking space and apartment are linked, only one mortgage can be registered over both titles. As a result some commercial lenders may refuse to lend because of inadequate security. In addition, if each title is legally owned by separate entities (i.e. two holding trusts), then in some cases the body corporate rules may be breached. And even if mortgage security and body corporate rules are not an issue, establishing separate LRBAs will result in additional cost and complexity. However, the ATO has indicated that an ‘in substance’ approach to the interpretation of an ‘asset’ for the purposes of the LRBA provisions is appropriate, and it intends to produce a self-managed fund ruling addressing ‘acquirable asset’ issues. MAStech improvements to real property Further complications exist with respect to the distinction between repairs and maintenance of an asset that is the subject of an LRBA, and improvements to that asset. While the LRBA provisions allow initial or subsequent borrowings to be used to maintain or repair an asset, improvements are not allowed. The explanatory memorandum to the amending Act, which introduced the new LRBA provisions states: money under a limited recourse borrowing arrangement applied for the acquisition of an asset can be used for expenses incurred in maintaining or repairing the asset, to ensure that its functional value is not diminished, but not to improve the asset, as this would fundamentally change the nature of the asset used as security by the lender, potentially increasing the risk to the fund. The distinction between a repair and an improvement is discussed in ATO Taxation Ruling TR 97/23, which although drafted in relation to deductions for expenses incurred, has been confirmed by the ATO as relevant in the context of the LRBA provisions. Improvements made to the asset using other, non-borrowed funds change the nature of the original asset such that it is treated as a new asset. This new asset will generally not meet the ‘replacement asset’ requirements of section 67B, resulting in breach of the SIS provisions unless the LRBA is wound up. For similar reasons, the ATO holds the view that real property cannot be subdivided. In short, real property cannot be improved while it is the subject of an LRBA. The impracticality of the distinction was acknowledged implicitly by ATO Commissioner Michael D’Ascenzo in April this year. If SMSF trustees contravened the LRBA provisions when repairing damage caused to LRBA property by the then recent natural disasters in Australia, the Commissioner stated the ATO: would be favourably inclined to exercise the Commissioner’s Discretion under section 42A(5) of the Superannuation Industry (Supervision) Act 1993 (SISA) to continue to treat the super fund as complying.