One of the biggest myths in the SMSF property space is that an investment property purchased through an SMSF can only be maintained to the state in which it was purchased. This could not be any further from the truth, as an SMSF can do as much with an investment property as any other entity - depending on how the property was purchased. Renovating SMSF property is possible, however it is important to know the SMSF rules and regulations before committing to action.
The only restriction an SMSF will face regarding what it can do is when the SMSF has used an SMSF Limited Recourse Borrowing Arrangement (LRBA) to purchase the property. If there’s no LRBA - there’s no restriction. The SMSF can knock-down, subdivide, develop, or any other endeavour as long as it can pay for the project using cash.
In reality however, most SMSFs purchasing investment properties do so using an SMSF loan and some level of gearing. When an LRBA is in place, one limitation will apply regarding what can be done to the property - ‘its nature cannot be changed’. The ATO has offered some examples of what improvements would change the nature of a property:
- Subdividing a block of land
- Building a house on a block of land
- Conversion of a residential property into a commercial property
- Knocking an existing house down and re-building a new dwelling
The ATO has established the guidelines below to describe what is possible with an SMSF purchase:
- Adding a granny flat
- Extension to add bedrooms or bathrooms
- Addition of a swimming pool
- Extension consisting of an outdoor area
- Addition of a garage, shed or driveway
- Update or increase size of a kitchen
- Addition of an integrated home automation system
- Addition of a second storey
Click here to read the entire release from the ATO.
It is also important to note that the funds needed to improve a property cannot be borrowed and must come from another source, namely the SMSF’s cash reserves.
The implications of the above information from ATO are substantial, as they unlock many value adding strategies for SMSF Trustees wanting to invest in property directly.
The first key point for Trustees is to ensure that they are borrowing as much as possible through their SMSF loan in order to leave as much liquidity as possible available post-settlement to pay for the desired improvements.
Once the property has settled and the required cash is in the SMSF’s Cash Management Account, the Trustees should seek advice from their accountant or adviser to ensure that the work they are considering does not change the nature of the property. You can never be too thorough when it comes to your SMSF compliance.
The Trustees can then engage a licenced builder who is going to deliver the quality improvements required. It is particularly critical that the renovation be delivered by the builder on budget as the SMSF is not able to borrow to cover any budget blow out. It is best to allow for some contingency when planning one such job.
Once the above has taken place, the SMSF can reap the rewards.
Building New or Renovating SMSF Property?
If you are considering a value adding strategy for your SMSF and want to deal with a team that fully understand the specificities of building new or renovating SMSF property, let Gentrify and SMSF Loan Experts combine their unique skill sets to deliver your SMSF the optimal result by calling 1800 GENTRIFY (1800 436 874) to discuss your requirements.
* The information contained in this blog is general information only. No part of this blog is to be construed as a solicitation to buy or sell any security or financial product. The author, in preparing this blog, did not take into account the investment objectives, financial situation and particular needs of any particular person. Before acting on any information or advice in this document, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances. You should also seek independent financial advice prior to acquiring a financial product.