Hello Michele
Thanks for your further comments.
The extract from QC 43265 needs to be understood in the context of the example that it relates to:
Case study scenario 2
Fiona and Walter have purchased a residential property under a limited recourse borrowing arrangement (LRBA). They intend to extensively refurbish the property into a clothing shop. The costs associated with the refurbishment will be met from accumulated funds held inside the SMSF and not from borrowings.
The refurbishment will fundamentally change the residential use of the property. The proprietary rights of the trustees will also be affected as the asset is a non-commercial property that is expected to generate an income to the fund.
Result
Under subparagraph 67A(1)(a)(i) of the Superannuation Industry (Supervision) Act 1993 (SISA), borrowings under an LRBA cannot be used to fund improvements. Money from other sources can be used to improve (or repair or maintain) a single acquirable asset. However, any improvements must not result in the acquirable asset becoming a different asset.
There are significant changes to the nature and use of the property, and fundamentally, the property has become a different asset.
How this may affect you
There are several conditions trustees must comply with that determine whether improvements to a fund’s asset constitute a fundamental change to that asset.
Where the fundamental nature of the property has changed either from residential to commercial or by the addition to, or fit-out of, the property, it is important to establish if the change has resulted in a different asset.
In this case, the asset is being changed from a residential property to a commercial property. As there are significant changes to the fundamental nature and use of the property, updating the premises in this case would clearly cause the property to become a different asset.
In this example, it was the extensive refurbishments of a residential property into a commercial clothing shop that changed the fundamental character of the asset.
This is apparently absent in the situation you described.
Best regards
The Auditors Institute