As a Self-Managed Superannuation Fund trustee, it’s difficult to know and understand all the rules around investing with your fund. The area of property investment can be very complex and many trustees are left wondering if they can renovate their property which is owned by their Super?
Many self-managed superannuation fund (SMSF) trustees like and understand the bricks and mortar investment that is property; more than the intangible financial instruments such as shares and bonds. Property investment has increased in SMSFs since the superannuation law permitted SMSFs to borrow and a downturn in the official interest rates, decreasing the return on cash based investments; term deposits.
However, superannuation rules in regards to purchasing and owning a property are complex and care needs to be taken when considering normal activities for a property investor such as renovating especially with there is an outstanding loan.
Renovating through an SMSF is only worthwhile if it significantly improves the return on your property and if it is allowable under the relevant legislation.
Outright or Borrowing
The ability to renovate a property that you own through an SMSF comes down to how you purchased it.
For SMSF’s that borrowed to buy the property, they are restricted in what they can do.
However if the SMSF purchased the property outright, then as the trustees of the SMSF you have full discretion to do whatever you want; renovate, sub-divide, develop, provided it is permitted under your SMSF deed.
Properties purchased with borrowings
If the SMSF’s property was purchased using borrowed money and the borrowing remains outstanding, then you are restricted around renovating or improving the asset.
1. The improvement is funded by cash already within the SMSF, therefore not with borrowed money.
2. The property is so fundamentally changed that it creates a ‘replacement asset’
Repair vs. Improvement
As discussed above, SMSFs are not allowed to finance improvements with borrowed monies. However, they can use borrowed monies for repairs.
A repair is work to restore the property without changing its character. It repairs, replaces or corrects something that is already there that has become worn out or broken through ordinary wear and tear, accidental damaged, or by natural disasters.
An improvement is work that provides a greater function to the property and usually involves increasing the value of the property via the addition of additional features.
What renovations create a replacement asset?
There are two main types of renovation / improvement that results in a breach in the replacement asset clause:
1. The property is physically altered in such a way that is has a different function or purpose. Example: Converting a residential property into a real estate agent’s office would be a replacement asset whereas adding pool or additional bedrooms would not result in a replacement asset as it is still a residential home
2. The legal rights associated with the property are altered. Example: Any changes to the title of a property, such as sub-division or creating strata titles result in a replacement asset
Can I renovate myself?
If you are not licensed and qualified to do the work required and you don’t provide these services to the general public through your business – you cannot renovate the property yourself.
If you are in the building and renovation industry – your SMSF can hire you or your company to perform the renovation at a market rate. It’s also worth noting the SMSF must purchase all materials and supplies directly; not from you or your business as this would be acquiring assets from a related party.
The road to financial success with your SMSF & property can be a satisfying journey; however, there are traps and pitfalls along the way that can result in some harsh outcomes is not correctly navigated.
Don’t shy away from investing by being put off by these restrictions. Having the right guide like the team in the Walsh Self-Managed Superannuation Division can prove to be the greatest tool in your renovator’s tool box helping you navigate around and in conjunction with the rules around renovation of your property owned by SMSF.