Can I renovate the residential property I own through my SMSF?

If your SMSF owns the property outright – that is, your fund has not borrowed to purchase the property – it is possible to renovate or improve the property.

However, if your fund has borrowed to purchase the property (commonly referred to as a limited recourse borrowing arrangement) and the loan or security trust is still in place, you are only able to make improvements/renovations that do not change the character of the property.

The ATO classifies this as when the character of the asset has been fundamentally changed. For example, a residential house that is converted into a restaurant or a vacant block of land that is subsequently subdivided resulting in multiple titles.

If the renovations/improvements are not financed by the SMSF, but rather are financed by the members themselves or another entity, the value of the improvement/renovation will generally need to be recorded as a contribution made to the fund and will count against the contribution caps.

It is important to note if the renovations are being undertaken by a builder who is a related party of the SMSF, the goods and material required to undertake the renovation should be purchased by the SMSF trustees directly from the supplier and not from the related party builder.

The issue here is the rule that prevents an SMSF trustee from acquiring assets, except for some limited exceptions, from a related party. A breach of the rules will occur if the related party builder purchases the goods and materials directly from the supplier and then invoices the SMSF trustees for the cost of those purchases.

As an alternative to the SMSF trustees purchasing the goods and materials directly from the supplier, it is permissible for a contract to be put in place between the related party builder and the SMSF trustees, such that the related party builder purchases the goods and materials as an agent of the SMSF trustee.

If you are thinking about renovating a property owned by your SMSF, you should consider seeking professional advice from a qualified financial adviser.

Peter Burgess, general manager, technical services and education, SuperConcepts 

 

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