Fine Tuning of SMSF borrowing guidelines

As i receive several enquiries each week from forum members concerning SMSF lending i thought it was prudent to post the following recent legislative changes that may affect members.

May 23 2012 the Australian Taxation Office finalised its rulings on what can be done to a property that is security for self managed superanuation fund borrowings and what expenditure a SMSF can borrow for. Such changes are retrospective from July 7 2010.

The initial draft ruling of 2011/01 has now become legislation although some of the wording from the draft ruling has been slightly watered down. In essence the legislation looks at 4 key areas.

1) An asset that is held as security for SMSF borrowings cannot be fundementally changed.
2) Borrowings cannot be undertaken to improve an asset.
3) Borrowings cannot be undertaken to repair an asset that isnt the security for the borrowing and of course you cannot mortgage an asset that is already owned by the SMSF.
4) Each borrowing arrangement must be for an individual asset.

The draft ruling started that a "repair" can restore the property to its original conditional even though it needed the repair when initial acquired. The subsequent legislation however states that the work to "restore" the asset can only be done to the state it was in when originally purchased. Subsequent wording allows for a SMSF to borrow to undertake repair although it is doubtful any potential lender would agree to additional lending.

If the asset is a great state of deteriotion at the time of purchase it is likely that potential work could be considered an improvement rather than a repair which certainly put renovators in a precarious position. Due to the penalties incurrent for a non compliant fund it might be worth making application for a ATO ruling before you start work.

You cannot fundementally change the security property. The final ruling gives more of a detailed list to what the ATO deem as "changing a property" of which you cannot borrow for such changes.
Allowable changes include:
1) Add on 2 bedrooms.
2) Add a shed, garage or outdoor deck area.
3) Put in a swimming pool.
4) Put in a granny flat as long as it isnt on a separate Title.

Of course of any kind of property development, strata titling etc is seen as fundamental change and you certainly cant borrow for this.

Legislation allowa for you to borrow the deposit on an off the plan property however it is unlikely any lender would advance upfront funds for this in the current climate. House & Land packages are allowed as long as there is no element of construction and Title does not Transfer until the building is complete.

All in all the legislative changes have caused borrowers more of a minefield and lenders no doubt will react with their normal over cautious approach.

Several lenders have entered the SMSF space however you would still be suprised the difference between lenders policy in such an area.

If anyone has any questions i am always happy to answer them.

Cheers

Yours in Finance