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SMSF borrowing rules examined

ATO SMSFR 2011/D1 SMSF limited recourse borrowing arrangements – key concepts

The limited recourse arrangement (LRBA) provisions are contained in section 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SISA).

This ruling explains the following key concepts and their application:

What can be acquired under LRBA

An 'acquirable asset' is any asset, other than money, that a trustee of an SMSF is not prohibited from acquiring by the SISA or any other law. For example, the prohibition on acquiring assets from related parties of the SMSF, subject to certain specific exceptions.

The asset must be a 'single acquirable asset'

The next consideration is to ensure that it is a 'single acquirable asset'. The ruling states that a trustee is acquiring a single acquirable asset in the sense that the trustee is acquiring a single object of property notwithstanding that it is comprised of two or more proprietary rights. However, this will only be so where it is reasonable to conclude that the object of the separate proprietary rights is distinctly identifiable as a single asset.

The ruling goes on to clarify the point that if assets can be dealt with separately this will mean it is more than one asset for the purposes of the LRBA provisions. It is not the acquisition of a single acquirable asset merely because the vendor wants to deal with the assets as a package or the lender will only lend over a group of assets.

Borrowings applied in maintaining or repairing but not improving the acquirable asset

The terms 'repairing' or 'maintaining' and 'improving' are not defined in the SISA hence they take their ordinary meaning.

The money borrowed under the LBRA may be applied not only in acquiring the acquirable asset but also in carrying out repairs and maintenance to the asset at the time of acquisition or at a later time.

However, no amount borrowed under the LBRA may be applied to improve the single acquirable asset.

The asset's qualities and characteristics at the time the asset is acquired is the reference point to determine whether an asset has been repaired or maintained or wither it has been improved.

The ruling states that an asset is improved if the functional efficiency of the asset or the value of the asset is substantially increased. This is a question of fact having regard to the state and condition of the asset at the time of acquisition.

Repair or maintenance example

Improvement example

A fire damages a part of the kitchen (cooktop, benches, walls and ceiling). Restoration of the damaged part of the kitchen would constitute repair of what is a subsidiary part of the asset being the house and land.

If the kitchen was also extended by extension of the house this extension would be an improvement.

The guttering on the house is replaced and the house is repainted. A fence is replaced. A fire alarm is installed to comply with new council requirements. This would be repair or maintenance.

The addition of a new pool or a new garage would be an improvement.

A cyclone damages the roof of the house. Replacement of the roof in its entirety is a repair.

The addition of a second storey to the house at the time of also replacing the roof would be an improvement.

Acquiring an asset in need of repair

If an asset was acquired under the LRBA that is in a deteriorated stated and the asset is subsequently repaired using borrowings under LRBA, the use of borrowing for that purpose is covered by the LRBA provisions.

However, the greater the state of deterioration of the asset at the time of the acquisition, the more likely it is that the subsequent alterations or changes to that asset will be regarded as improvements.

For example, replacing some broken windows in a house immediately following the acquisition of the house and land, which is under an LRBA, is a repair for which borrowings can be used. It is of no consequence that the windows were in need of repair at the time of acquisition.

However, a substantial renovation of a run down house immediately following the acquisition of the house and land, which is under an LRBA, would improve the functional efficiency of the asset as well as substantially improve its value and thus would amount to an improvement for which borrowings under the LRBA could not be used.

Non-borrowed money can be used to improve an asset

Although borrowings under an LBRA cannot be used to improve a single acquirable asset, non-borrowed money could be used to improve (or repair or maintain) that asset, but not changed to the extent that becomes a different asset.

Whether a change to a single acquirable asset results in a different asset is a question of fact and degree, the ATO views the following considerations as relevant:

Single acquirable asset

Whether it is a different asset(s)

Vacant block of land on single title

The vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.

Vacant block of land on single title

A residential house is built on that vacant land (still single title). The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset.

A house and land

The house is demolished and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets.

A house and land

Rezoning of the land is granted and the house is renovated and is now commercial premises. The character of the asset has fundamentally changed from residential premises to commercial premises. This is a different asset.

A four bedroom house and land

A fire destroys the four bedroom house and a four bedroom house is constructed using insurance proceeds. Rebuilding a four bedroom house does not fundamentally change the character of the asset held under the LRBA. Rebuilding the house restores the asset to a house and land.


The draft ruling provides numerous helpful examples of circumstances to further illustrate the ATO’s views. View these examples here.

Certain parts of the above have been reproduced from SMSFR 2011/D1.

If you are looking to investment in real property with borrowing in a SMSF, we can assit you to set up the structure. Please contact us to discuss further. Our contact details.