Investing in property through your self-managed superannuation fund (SMSF) can be a shrewd financial move. But it also comes with a complex set of rules and regulations, governing what you can and cannot do with the property.
As a result, it can sometimes feel safest to do nothing at all because, that way, it’s more likely you’ll stay on the right side of the Australian Tax Office (ATO).
But while property investment can be more challenging when done inside an SMSF, that’s not to say it’s completely impossible. For example, conventional wisdom has it that you can’t develop property in an SMSF. However, that’s not strictly true.
What about renovating SMSF property? That’s also perfectly possible, provided you meet two criteria:
- Your fund hasn’t borrowed money to buy the property
- You have the cash on hand to do so
So if your SMSF owns the property outright, you can renovate to your heart’s content – provided your trust deed allows you to do so.
Changing or updating a trust deed isn’t a complicated task. However, as the deed is a legal document, it can be a good idea to have an experienced SMSF conveyancer do this for you.
However, if your SMSF purchased the property using a limited-recourse borrowing arrangement and a mortgage is still outstanding, you can’t renovate.
Repairs vs renovations: what’s the difference?
Under SMSF law, you are not allowed to use borrowed funds to make improvements that increase the property’s value. That said, repairs are allowed – as long as the work does not improve the property.
But what does the ATO count as a repair and an improvement? While there can be a fine line between them, typically a:
- Repair – restores or makes good any defects or damage to the property without changing its original character
- Renovation – makes structural/aesthetic changes or adds features to a property usually to add value
For example, let’s imagine you own an SMSF property. If part of the property burns down, and you rebuilt it as it was – that would be classed as a repair. However, adding an extension or a pool in the process would see it classed as a renovation.
Can you do the renovations yourself?
The rules around SMSF renovations don’t stop there. You also need to consider that SMSFs need to transact on an arms-length basis.
In practice, this means a fund member or related party can’t do the renovation work – unless they are in the building industry. In that case, they must be paid the market rate. What’s more, payments for materials must be made by the fund not via the builder – as the fund would then be acquiring assets from a related party.
Rhiannon Leonard is a Property Lawyer at SMSF Conveyancer.
Buying or renovating an SMSF property? Keep on the right side of the law by working with an expert SMSF conveyancer. For professional SMSF conveyancer services, call us on 03 9070 9810 or request a quote.