The draft ruling issued recently on the Superannuation Borrowing Rules is most welcome. For the most part it clarifies issues that the SMSF industry had been speculating on since sections 67A and 67B came into force last year.
There are a few issues that remain unresolved, including whether breaches will arise where there are unsolicited improvements to a property (e.g. by improvements by tenants), where a new title is issued as part of a forced partial resumptions of land, or where a unit owned under an LRBA arrangement in a strata title complex is destroyed and the fund wants to use insurance proceeds to rebuild the unit.
However, one of the more fundamental issues created by the ruling is the notion that, after undertaking an improvement, there could be a different asset, and that this different asset replaces the original asset. What, then, has happened to the original asset? Has it been disposed of, such that CGT Event A1 occurs? Possibly not, as A1 also requires a change of ownership.
If not A1, then has the original asset been lost or destroyed, triggering CGT Event C1? TD 1999/79 looks at loss and destruction, and refers to the Macquarie Dictionary definition of "destroy" which includes "to extinguish". It's hard to argue that, if there is now a different asset replacing the original asset, the original asset has not been extinguished.
It seems to me if the ATO view is correct, it has much wider implications for any taxpayer (superannuation fund or otherwise) looking to improve an asset.
