Use of different materials
Whether or not property has been replaced or renewed by using different material to the original is not itself a determinative factor when deciding whether the expenditure incurred constitutes a repair or an improvement. What is more important is whether the work produces a new and different function, or an additional function to the original.
However, even if the work is done using different material which enables the property to perform its function marginally more efficiently, the work may still constitute a repair. The test is whether there is a sufficient degree of improvement to the property, which has produced a new and different function or an additional function to that which existed prior to the work being carried out. The greater the enhancement to the property’s efficient functioning, the more likely it is that the work will constitute an improvement.
For example, if a fibro wall, which has been damaged, is replaced with a brick wall, the new wall would be considered to be an improvement. However, if the wall was replaced with a current equivalent, such as plasterboard, the new wall would not be considered to be an improvement because the new wall merely restores the efficient function of the wall without changing its character, even though different material has been used.
Repairing a property with materials which are more resistant to floods and cyclones would ordinarily constitute an improvement. However, in light of the Commissioner’s recent announcement, it would be reasonable to expect the Commissioner to exercise discretion to overlook a breach of the borrowing provisions in situations where the property has been damaged by a natural disaster and is now being repaired with different material. However, caution should still be exercised in these situations where the repair is likely to result in a significant change to the property’s income-producing ability or it significantly enhances its salability or market value beyond that which existed prior to the property being damaged.
The ATO has advised that they are currently discussing the issue of asset improvements under a limited recourse borrowing arrangement with Treasury and the Australian Prudential Regulation Authority (APRA). Due to the complexity of the underlying issues, the ATO is progressing this issue, along with issues relating to the definition of a single acquirable asset under section 67A, as priority technical issues. It is likely that the ATO will be releasing further guidance on these issues in the form of determinations or a ruling. The timeframe for the release of any determinations and rulings will be published on the ATO’s website in its Public Rulings Program.
Peter Burgess is the national technical director of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
