Peter Burgess illustrates the concept of a single acquirable asset demonstrates the application of key concepts relevant to limited recourse borrowing arrangements provisions.
Subsection 67A(1) of the Superannuation Industry (Supervision) Act 1993, which applies to limited recourse borrowing arrangements (LRBAs) put in place on or after 7 July 2010, permits the trustee of a regulated superannuation fund to borrow money to acquire a 'single acquirable asset'.
The term "single acquirable asset" is a key concept relevant to LRBAs, but what constitutes a 'single acquirable asset' for the purposes of subsection 67A(1)?
The term "single acquirable asset" is not defined in the SIS Act. However, the term 'acquirable asset' is defined in section 67A of the Act as an asset which is not money (whether Australian currency or currency of another country). Neither the SIS Act, nor any other law, prohibits the trustees from acquiring the asset.
An asset is defined in subsection 10(1) of the Act to mean any form of property. Therefore, an acquirable asset is any form of property, other than money, that the trustee is not otherwise prohibited from acquiring.
The Australian Taxation Office (ATO) Draft ruling SMSFR 2011/D1 (the draft ruling), says that as the term 'property' can be used to describe either proprietary rights or the physical objects of property rights (for example, land or machinery).
It is necessary to consider both when determining whether money borrowed under a LRBA has been applied for the acquisition of a single acquirable asset.
The draft ruling goes on to say that:
"… it may be possible to conclude 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 object".
The draft ruling uses the example of a factory complex which covers three separate legal titles to illustrate that the object (the factory) is a single acquirable asset and can be acquired under one LRBA, notwithstanding that there are multiple legal titles present.
In addition to the presence of a physical characteristic which may make an object distinctly identifiable as a single object, the draft ruling also refers to legal impediments (for example, a State or Territory law) which may prevent an object which comprises multiple legal titles from being dealt with separately.
If a law exists that requires the assets to be sold together, and they cannot be sold separately without contravening that law, the assets will be considered a single asset for the purposes of the LRBA provisions.
However, this concession does not extend to commercial contracts where the asset could be sold separately but the vendor and/or purchaser decide not to.
In Self Managed Superannuation Fund Professionals' Association of Australia's (SPAA's) view, additional scenarios and explanations are required in the draft ruling to demonstrate how the term 'single acquirable asset' should be applied in situations where the presence of a physical characteristic is considered temporary or demountable versus a physical characteristic of a more permanent nature.
Presumably, it is the intention of the ruling to ensure only permanent physical characteristics are used to define an asset as a single asset.
In this regard the views expressed by the ATO Commissioner in SMSFR 2009/1, regarding the indicators of a permanent structure, are relevant. This ruling refers to the building's attachment to permanent foundations and connections of water and electricity as indicators that the building is a permanent structure.
Similarly, the approach which enables two assets to be treated as a single asset in situations where there is a legal impediment to the assets being sold separately requires further clarification.
For example, would a security which is contractually bound to one or more other securities to form a single saleable unit (for example, a stapled security) be a single asset or two assets for the purposes of the LRBA provisions?
In addition, would the terms of a contract which is enforceable under Commonwealth or State law and which requires two assets to be sold as one, result in the asset being treated as a single asset for the LRBA provisions?
The draft ruling draws a distinction between commercial agreements and any law which requires the assets to be sold together. However, the terms of a commercial contract are themselves enforceable under law.
Presumably the intent of the draft ruling is to ensure all types of commercial agreements which require two assets to be sold together are treated as separate assets for the purposes of the LRBA provisions.
Perhaps a better approach would be to apply a "look through" approach whereby the assessment of the object as being either a single asset or multiple assets would depend on the existence of multiple proprietary rights if the commercial contract was removed.
The examples provided in the draft ruling also illustrate the difficulties which exist for rural properties which have been constructed on multiple legal titles. Example 3 in the draft ruling refers to farmland and illustrates how the outcome differs depending on whether the shed is constructed within one legal title or across multiple legal titles.
It is difficult to explain why two identical rural properties (or any commercial property for that matter) should be treated differently just because a shed or physical object is constructed across the legal titles in one property and not in the other.
Requiring a property to be treated as two separate acquirable assets in these situations is impractical and would require a lender to assign a value to each component of the land which comprises a separate legal title.
Although the legal form is two separate titles, the economic reality and the practicalities are that the two titles are not treated separately.
Arguably these issues could be overcome by referring to the economic reality of the asset and applying the concept of an economic entity as opposed to a simple legal form when defining the boundaries of an asset.
This test could be applied in addition to the physical characteristic and legal impediment test referred to in the draft ruling.
In order words, if an object comprising separate legal titles represented a single economic entity, or there exists a physical or legal barrier which prevents the object being dealt with as separate assets, the object should be considered a single asset for the purposes of the LRBA provisions.
Using this approach, a rural property could be considered as a single economic entity and a single acquirable asset for the purposes of the LRBA provisions, irrespective of the number of legal titles and its physical characteristics.
Peter Burgess is SPAA's national technical director.
