When can I renovate a property owned by my SMSF? How can I fund renovations of a property owned by my SMSF?

Borrowing for repairs vs renovations/ improvements

Self-Managed Superannuation Fund’s are allowed to borrow money to repair acquirable assets but are prohibited from borrowing money to improve acquirable assets. Hence, it is vital that trustees understand the what the differences are between ‘repairing’ an asset and ‘improving’ an asset before inadvertently incurring expenses that result in a breach of super legislation.

Repairs are generally required due to the deterioration of an asset due to ordinary wear and tear or damage that occurs overtime. A repair restores the asset to its original condition and includes the replacement of a part of an asset that restores its functionality.

In contract, improvements are more substantial in nature and the state of the asset has changed for the better – normally resulting in an increase in value of the asset. However, alterations or additions that provide a minor enhancement in the state or function of the asset will not be considered an improvement.

When can a SMSF renovate/ improve its property?

As mentioned above, a SMSF is specifically prohibited from borrowing to fund a renovation or improvement of its property. However, the SMSF can use money from other sources (including its own money) to fund improvements to an asset that is subject to a Limited Recourse Borrowing Arrangement (LRBA).

Whilst a SMSF can use its own money to fund improvements, its important that those renovations do not result in an asset that was acquired under an LRBA to become a different asset or to have fundamentally changed.

Whether renovations to a property will result in the asset becoming a different asset will be determined by the facts of the individual situation. Relevant factors would include:
(a) whether the asset has been entireley replaced by another asset;
(b) whether the function of the asset has significantly changed through the improvement; and
(c) whether there is still a single acquirable asset.

For example, a residential property purchased under a LBRA that has been renovated to change the front part of the house into a hairdressing studio would be significant enough for the asset to have fundamentally changed and become a replacement asset. This would result in a breach of super legislation.

In contrast, works to renovate a bathroom in a residential property purchased under a LBRA would not be sufficient enough for the asset to be considered fundamentally changed or a replacement asset. This would not result in a breach of super legislation.

Thinking about renovating your SMSF property? Our SMSF experts can help you navigate these super rules and provide you with invaluable guidance during the renovation process. Get in contact with us today.