Renovations on Your Self Managed Superannuation Fund Properties – the Latest News from the ATO

While purchasing an property investment through your self-managed superannuation fund (“SMFP”) using a limited recourse loan can be a complex process, the rewards of SMFP properties can be enormous if it is done right. Once you’ve purchased your property, you may be thinking about undertaking ongoing repairs or renovations. At this stage, you will need to know that the Australian government has some specific rules when it comes to renovations on SMFP properties. We look at these in more detail below.

The Latest News on Renovations on SMSF Properties – What’s the Rule?

According to the superannuation borrowing laws introduced in July 2010, “replacement by way of improvement of real property” is not permitted for properties purchased by a SMFP through a limited recourse loan arrangement. According to the minutes of a meeting with finance and accounting industry representatives in September 2010, the ATO stated that:

…an improvement may change the state or nature of the asset such that it will give rise to a different asset to the single acquirable asset that was the subject of the arrangement

The ATO’s current view seems to be that it depends on the type of renovation being undertaken. If these renovations result in a completely different property to that which was originally purchased under the limited recourse loan agreement, then there will be a breach of the rule.

So the rule disallows renovations that result in a different asset, no matter how they are funded, and they also forbid borrowing or drawing down additional funds to pay for any type of renovation. However, if the SMSF uses its own money to improve the asset and the improvement does not result in a different asset, then it may be fair to say that restorative or cosmetic improvements are permissible as most of these types of changes will not lead to the creation of a whole new dwelling.

There will be times when renovations do result in the creation of a new asset, and it may be useful to look at GST legislation and policy, which have something to say on “new residential premises created through substantial renovations.” Examples can be found in GST Ruling 2003/3 on the ATO website. Note that SMSFs cannot buy land and then build land on that property, or borrow money to do so (though there is a way to do so lawfully through a limited recourse loan from a related party).

Exception to the Rule

Exceptions apply if the property was purchased under the previous SMSF borrowing rules that were in effect between 24 September 2007 and 7 July 2010. The old rules do not have the same restrictions on renovations and borrowing for renovations for SMSF properties.

Justifications for Renovation Restrictions

It seems that the ATO associates property renovation or development with a degree or risk that it does not necessarily want to encourage in SMSF trustees. The government’s view of the role of superannuation funds appears to be one that emphasises stability, and of building benefits for members in retirement with minimal or no risk. Thereby, policy on SMSFs is aligned to discourage borrowing, development, and now, renovation. In case of default, minimising loans reduces the amount of super money at risk, even though renovations can result in substantial, even massive, improvements in property values that more than compensate for the money expended for renovation.

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