All Topics / Legal & Accounting / SMSF property renovations

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  • Profile photo of DeanCollinsDeanCollins
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    @deancollins
    Join Date: 2015
    Post Count: 376

    Can you confirm that this article is wrong where it says a SMSF investment property cant have renovations done to it
    http://www.smh.com.au/money/super-and-funds/how-to-get-the-boss-to-help-pay-the-mortgage-20150813-giydt0.html

    I’m assuming what they are inferring (poorly) is that the SMSF has to pay for the renovations and its not the super recipient who can “pay for the renovations” eg its the legal entity that has to meet all costs.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi DC

    If your SMSF owns the property outright, meaning your fund has not borrowed to buy the property, you can renovate or improve the property. However, if your fund has borrowed to buy the property ( referred to as a limited recourse borrowing arrangement) and the loan is still in place, you can only make improvements or renovations which do not change the character of the property. I.E a residential house that is converted into a restaurant, or a vacant block of land that is subdivided, resulting in multiple titles, would be considered changing the character of the property.

    It is also important to note that if the renovations or improvements are not financed by the SMSF, but rather by the members themselves (or another entity), the value of the improvement or renovation will generally need to be recorded as a contribution made to the fund and will count against contribution caps.

    Hope this makes sense.

    Cheers

    Yours in Finance
    0-40 Properties in a decade. Email me for a copy of my API interview

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of DeanCollinsDeanCollins
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    @deancollins
    Join Date: 2015
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    Yep Richard,

    Like always you are the voice of wisdom….and what the press writes about and reality totally different.

    Your comments make total sense, particularly renovation costs being counted as contributions which is what I wrote/initially thought. Curious though why a SMSF couldnt do a subdivision or “change the property to get he best return on investment”?

    In a subdivision wouldn’t the SMSF still own both titles etc?

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
    Post Count: 340

    Yep Richard,

    Like always you are the voice of wisdom….and what the press writes about and reality totally different.

    Your comments make total sense, particularly renovation costs being counted as contributions which is what I wrote/initially thought. Curious though why a SMSF couldnt do a subdivision or “change the property to get he best return on investment”?

    In a subdivision wouldn’t the SMSF still own both titles etc?

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    Needs to be a single acquirable asset…

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
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    Profile photo of DeanCollinsDeanCollins
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    @deancollins
    Join Date: 2015
    Post Count: 376

    Well that’s just silly….which idiot wrote that rule, it would be like saying a SMSF can only buy 1 stock……

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
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    Its legislation mate. Many things suck about law – it is what it is

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi Dean

    The reason the SMSF cannot change the character of the property while it’s under mortgage is because the bank/lender has taken a specific property with a specific title as security for the loan.

    You cannot take out the loan giving them one house on one block of land (ie one title) and then suddenly split that title into two pieces, because these would be new titles that the bank wouldn’t have security over you see. You can’t say thanks for the cash Mr Bank, but the title that existed when you gave my SMSF the cash doesn’t exist any more so you are now the proud owner of an unsecured loan. Nothing for you to seize if our SMSF decides to stop making mortgage repayments.

    Any time a request is made to change the title, the mortgagee (ie the bank) is notified. And they would put a top to it quick smart. And this is in addition to the fact that changing the nature of the property while it’s under mortgage is also against the law in the superannuation space, and I hear prison is not a nice place to be, so it’s best to play by the rules. At the very least if you broke a rule like this, you would expect ASIC/ATO to fine you and force liquidation of all the SMSF assets and have the SMSF closed, forbid you from being a SMSF owner any more, or a director of anything for that matter, which is a problem for folks in many professions such as the building, accounting, financial or legal sectors.

    In order to do a subdivision, the SMSF would first need to pay off the loan, and then use its cash in its bank account to perform the subdivision.

    With regards to renovations, as has been mentioned they are allowed within reason, but the SMSF cannot use borrowed money to do the renovation. If it has enough money in its bank account to perform the renovation then excellent. If it doesn’t and a member chooses to beef up the SMSF balance by transferring money into it, then as Richard says, that would be deemed to be a contribution and would be counted within the annual contribution caps.

    You need to be very careful what you do with a reno … if you manage to devalue your property due to your reno (oh yes, people manage to make poor decisions and make the place less desirable than it was to start with) then the SMSF will need to worry about what the mortgagee would have to say about it. If the property is under mortgage, it is much less headache for everyone that tweaks are kept to repairs and minor improvements. Perhaps some paint. Perhaps some new carpet or a new benchtop. That sort of thing. Most folks take a fair while to get money into super so you don’t want to have to spend it all straight away on a reno. It’s easier if the property is newish, or dated but not offensive and not in need of a renovation for at least 5 years. This gives the SMSF to get some runs on the board before it needs to stump up cash for renovation.

    Hope this helps.

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    A SMSF can do a sub-division one way with borrowings – through a unit trust with one or more unrelated parties with the SMSF not controlling the trust.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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