Older properties take on new sheen for SMSFs following tax reno ruling

Cashed-up self-managed super funds are expected to develop an appetite for fixer-uppers following the release of draft rules that allow them to renovate properties they hold provided they don’t borrow the money to make the improvements. 

According to Aaron Dunn, managing director at The SMSF Academy, the draft ATO ruling has “many positive implications, in particular it allows trustees to use cash in the fund to improve an acquired asset”.

SMSFs with cash reserves are likely to find older properties in need of renovation more attractive propositions, Dunn says, while those funds that need to borrow to invest are likely to find newer properties, including those available off the plan, more attractive. 

Under the draft ruling released by the ATO, money borrowed by SMSFs under limited recourse borrowing arrangement (LRBA) provisions can be used not only to acquire a property but “also in carrying out repairs and maintenance to the asset whether necessary at the time of its acquisition or at a later time”. 

However, “no amount that has been borrowed by the SMSF trustees under the LRBA may be applied to improve the single acquirable asset”. 

If a trustee of an SMSF uses borrowed money to improve their property, they will contravene the rules covering LBRA provisions. 

The ATO provides examples to demonstrate the difference between repairing or maintaining a property and improving one: 

Repair or maintenance examples (borrowing allowed)

• A fire damages a part of the kitchen (cooktop, benches, walls and ceiling). Restoration of the damaged part of the kitchen would constitute repair of what is a subsidiary part of the asset being the house and land. 

• The guttering on the house is replaced and the house is repainted. A fence is replaced. A fire alarm is installed to comply with new council requirements. This would be repair or maintenance. 

• A cyclone damages the roof of the house. Replacement of the roof in its entirety is a repair. 

Improving examples (borrowing not allowed)

• If the kitchen was also extended by extension of the house this extension would be an improvement. 

• The addition of a new pool or a new garage would be an improvement. 

• The addition of a second storey to the house at the time of also replacing the roof would be an improvement.

Rural property example

Repair or maintenance examples (borrowing allowed)

• Replacing a section of the cattle yards or the existing fencing is a repair. 
• Ensuring the bores, windmills, tanks and troughs continue working is repair or maintenance. This would include laying new pipes between the tank and trough. 

Improving examples (borrowing not allowed)

Each of the following additions is an improvement:

• a new set of cattle yards; 
• a new bore, tank, windmill and trough; 
• a dam; 
• a further two kilometres of fencing. 

Comments on the proposed ruling can be submitted up until October 28.