The degree of work carried out on property purchased under a limited recourse borrowing arrangement (LRBA) will define whether it is a repair or an improvement and trustees can remain compliant even when making changes that appear to be enhancing that asset.
Cooper Partners Financial Services senior manager Lindzee-Kate Tagliaferri stated this was possible because while section 67A of the Superannuation Industry (Supervision) Act addressed work carried out, it also considered what impact it had on the whole asset.
“Maintenance is work done to ensure the asset continues to function in its current state,” Tagliaferri said during a presentation hosted by The Auditors Institute earlier this week.
“Repairing an asset refers to remedying existing damage, defects or deterioration and indicates the object is currently not functioning as it should be and the work carried out will restore it.
“Improvements require a significant alteration to the function or the state of the asset must be altered for the better through substantial change or the addition of substantial features or rights to the asset.”
Tagliaferri pointed out there was no requirement to use the same materials or restore something to the same form it was prior to work being carried out, given how section 67A views any asset under an LRBA.
She pointed to Self Managed Superannuation Funds Ruling (SMSFR) 2012/1 to highlight when a repair could become an improvement, noting it was not only dependent on the materials used or the functionality of the property, but whether there had been a significant improvement in the state or function of the whole property.
“Using modern or superior materials to repair something does not mean that there will be an improvement, especially where the increased function or the state is considered minor on trifling,” she said.
“An example there [in SMSFR 2012/1] is where a kitchen is destroyed by a fire and it’s restored using modern equivalent materials. It’s not necessarily an improvement, even though the restoration is not exactly as it was before.”
However, this approach had limits when applied to deterioration or damage to an asset that existed before it was purchased using the LRBA and the borrowing would be used to make repairs after the acquisition, she said.
“If you buy a house, it’s a little bit dilapidated and been used as a drug house, and will be entirely repainted, this will be accepted as repairs,” she said.
“The more significant the repairs are, the more likely they will become improvements, for instance, if you buy a residential house that has no roof on it, you may need to consider whether or not it would actually be repairs or an improvement.”
