A senior executive in the SMSF lending space has cautioned practitioners and trustees as to the subjective nature of the borrowing rules under section 67A of the Superannuation Industry (Supervision) (SIS) Act and how different types of expenditure that appear similar in nature can cause a compliance breach.
Bluestone head of specialised distribution Richard Chesworth recognised the provisions regarding SMSF gearing can be confusing with regard to financing for the maintenance of an asset.
“An SMSF can borrow for the acquisition, maintenance or repair of an asset. SMSFs are prohibited from borrowing for improvement whereby you change the character of the asset,” Chesworth told selfmanagedsuper.
However, he pointed out these restrictions are not as clear cut as they appear to be at face value.
“For argument’s sake I’ve purchased an old place in Marrickville in my SMSF using a limited recourse borrowing with a pretty run-down kitchen,” he said.
“The tenant moves out and it gives me a chance to do up the kitchen to enable me to charge more rent on the property. The existing kitchen doesn’t have a dishwasher. So I’m going to redraw on the borrowing to install a dishwasher. Is that expenditure considered maintenance or repair, or improvement of the asset?” he asked.
“Now I would have thought it is an improvement but the ATO has noted in its written guidance saying it deems a kitchen of today’s standards would have a dishwasher so we deem that as maintaining the asset and not improving it. So I can borrow to add a dishwasher to the kitchen and that’s great.
“But if I was to knock out a side wall and put aluminium framed glass by folds in there to let more light in the same guidance says if I do that, that is move a wall, it’s deemed improving the asset which is a breach of the borrowing rules.”
He explained in neither scenario had the lender done anything wrong but that the subjective nature of these provisions was something trustees have to consider.
