ATO draft ruling targets 'substantial changes'

OnePath national technical manager Graeme Colley has clarified exactly what constitutes a repair under the Australian Taxation Office's (ATO's) recent draft ruling on limited recourse borrowing arrangements.

The ATO draft ruling SMFSR 2011/D1 looks only at two things, Colley said: what is meant by "single acquirable asset", and what constitutes a "repair" as compared with an "improvement".

The main link with legislation is the term "economic unit", Colley added.

Under the draft ruling, if the kitchen in a property owned by a superannuation fund is destroyed by a flood or a fire, the borrowings under the limited recourse borrowing arrangements can be used to fix it, Colley said.

However, in some cases the entire property may be destroyed.

"[After the floods in Queensland] the Commissioner came out in February and said 'we'll be quite generous in the way in which we treat a property if there are improvements made to it or if it is replaced'," Colley said.

 "[This ruling] extends what the Commissioner said in February, and says that if the property is destroyed and you put an equivalent property on it - it usually won't be the same materials - and that economic unit isn't changed in any dramatic way, it's going to be okay," he added.

A strictly technical reading of the legislation would say the above examples would be regarded in some cases as being an improvement because the materials being used for the repair are not similar - or not exactly the same - as what was there before, Colley said. But in the case of a 1950s kitchen being destroyed, it would be technologically impossible to replace it with the same materials, due to changes in materials like plastics, he said.

"What's an improvement? The Commissioner's saying it's if the economic unit is extended in any way. If you were to have a house on a block of land and you were to replace it with two town houses, that's certainly an improvement. Substantial changes to a property are the issue," Colley said.