Self-Managed Super Funds (SMSFs) are increasingly becoming a favoured investment vehicle for property. Nevertheless, there are stringent regulations and guidelines that must be adhered to when it comes to implementing modifications or enhancements to the property. These regulations are in place to guarantee that the SMSF’s sole objective—ensuring your retirement—is maintained. This article will delineate the types of renovations that are permissible and prohibited for SMSF-owned properties.
Knowing SMSF property rules
The Australian Taxation Office (ATO) offers recommendations for SMSF property management and improvements. The single purpose test requires the SMSF to provide retirement benefits to its members. Renovations that threaten this or benefit the homeowner may violate this rule.
Buying property outright using SMSF cash is different from buying it with a loan. These differences must be understood to avoid fines.
Renovation of the Property purchased with cash (no SMSF Loan used)
You have more remodelling options if your SMSF bought the house without financing.
What You Can Update
Property acquired without financing may be repaired and improved. As long as the SMSFs main purpose—retirement benefits—is accomplished, renovations that boost property value or structure are authorised. Allowable modifications include:
- Kitchen and bathroom upgrades
- Room additions or extensions
- Modernising obsolete structures
- Landscaping or outdoor living areas
No borrowing means you may boost the property’s worth via upgrades as long as the SMSF’s investment plan stays true to its original objective.
What you can’t renovate?
Cash purchases of properties are still limited. Living in or allowing family members to dwell in the property is usually prohibited. Renovations must match SMSF’s investment plan. Overly extravagant upgrades that don’t meet the property’s retirement asset purpose may violate SMSF requirements.
Your SMSF funds may be spent to renovate your property, but not to change its kind.
Renovation of property with an SMSF Loan
Renovation regulations are tighter if your SMSF borrowed money to buy the property.
What You Can
Property acquired with borrowed monies is restricted to repairs and upkeep. This limits you to restoring or fixing the property. Allowable fixes include:
- Leaky roof repair
- Broken window/door replacement
- Wall painting
- Floorboard restoration
These repairs are needed to keep the property in excellent shape without increasing its value. The property’s nature and purpose must not alter during repairs.
What you cannot do?
When borrowing, you can’t undertake major home upgrades. This includes:
- Adding rooms or structures
- Renovating kitchen or bathroom beyond repairs
- Installing a pool or landscaping
- Altering property plan or functioning
These renovations might change the property’s essential worth or character, which is prohibited when acquired with an SMSF loan.
Avoid these mistakes
When upgrading SMSF homes, trustees sometimes make mistakes. Some frequent errors are:
- Borrowing for even simple renovations like installing contemporary fixtures might violate the regulations.
- Renting or staying in an SMSF property for personal gain may be a breach.
- Not keeping records: Lack of documentation of remodelling expenses, repair bills, and repair reasoning might cause compliance concerns.
Breaking these regulations might result in severe fines, so follow them.
Talk to the experts
Renovating an SMSF property is complicated, and mistakes may cost a lot. This is why you need expert counsel before renovating. An SMSF adviser, accountant, or financial planner may assist you comply with ATO laws and SMSF legislation while working on the property.
If done properly and according to ATO requirements, SMSF property renovations may improve its condition. Knowing the difference between repairs and renovations and how financing affects renovation limits is key. Following the regulations, obtaining competent advice, and complying will safeguard your SMSF property and help you reach your retirement objectives.
Contact ASK Financials to discuss SMSF financing or what is covered under SMSF property.
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