If you’re wondering if you can renovate your SMSF investment property, the short answer is ‘maybe’. The long answer depends on a few different factors, including what type of renovation you’re looking to do and the source of your funds. Choose your scenario below for more details on renovating your property.
Your self-managed super fund purchased the property without needing a loan
If the purchase of your SMSF property was made entirely without the help of a mortgage, you are free to make whatever changes you’d like! This, of course, is subject to what is stated in your SMSF deed. If the deed allows it, and you have the cash on hand to spend, you are free to bulldoze, renovate, develop or sub-divide to your heart’s content without breaking any SMSF property rules!
You purchased the property with an SMSF loan and want to make improvements
Due to the rules surrounding limited recourse borrowing arrangements (LRBA), an SMSF that has purchased a property using an SMSF loan (an LRBA) is prohibited from borrowing funds to improve the asset. While the SMSF is unable to borrow to make improvements, it is possible to use other sources of funds, such as the cash reserve or even money from the members of the SMSF. If an improvement is to be funded by the SMSF members, it’s important to remember that the value of the improvement counts toward the contributions cap.
While improvements are allowed if your fund can cover the costs itself, there is a limit to the changes that can be made to an asset purchased under a limited recourse borrowing arrangement. A single asset purchased under an LRBA can be improved as long as the costs are not covered by borrowing. And, any improvements made to the acquirable asset must not result in it becoming a different asset.
For example, if you purchase a residential building under an LRBA and want to make improvements to the building so it can be used for commercial purposes, the asset would be fundamentally changed. It would contravene the SIS Act — regardless of where the money came from for the renovation.
When figuring out what constitutes a fundamental change in the asset, there are some factors to consider. These factors indicate an asset has been changed and therefore goes against superannuation legislation:
- There is no longer a single acquirable asset.
- The improvement has significantly changed the function of the asset.
- Another asset has entirely replaced the original asset.
You purchased the investment with an SMSF property loan and need to make repairs
It’s reasonable to assume that a property is going to need some kind of repairs as it goes through general wear and tear, so fixing up SMSF investment properties is looked at completely differently to renovations or improvements. If you are restoring your property without changing its character, it’s possible to use borrowed monies to cover the cost of the repair without breaching any arrangement or legislation.
Check the definitions before you jump into repairing or renovating your SMSF investment property
The rules and regulations surrounding self-managed super funds are complex and confusing. If you are thinking about renovating or repairing your SMSF property, we’d love to chat with you to make sure you’re not breaching any rules. Take advantage of our free SMSF finance session.