FAQ on SMSF Property Renovation | Wilson & Assoc Chartered Accountants

FAQ on SMSF Property Revnovation

Investing in property is a common investment strategy in Self-Managed Super Funds (SMSFs). If you are planning renovation for an SMSF property, there are some specific rules and regulations to watch out for. This article addresses the top frequently asked questions (FAQs) about SMSF property renovation.

1. Can my SMSF renovate a property it owns?

Yes, your SMSF can do any kind of renovation on a property it owns outright (without borrowing). However, if the property is acquired using a Limited Recourse Borrowing Arrangement (LRBA), there are strict rules about what type of renovations or improvements can be made.

2. What is a Limited Recourse Borrowing Arrangement (LRBA)?

An LRBA is a borrowing arrangement where the lender’s recourse is limited to the asset being purchased. This means that if the SMSF defaults on the loan, the lender can only claim the property and not other assets of the SMSF. 

This is to protect the remaining SMSF assets in case the SMSF is not able to service the LRBA mortgage.

3. What are the restrictions on the renovation of an SMSF property purchased with an LRBA?

If your SMSF owns the property outright, you can renovate it any way you like, including improvement.

If a property is purchased with an LRBA, the renovation is restricted to maintenance and repair, not improvement or upgrade. 

4. What are the different types of renovation?

  • Maintenance: This involves the regular upkeep required to keep the property in its current, functional state, such as repainting or servicing the air-conditioning system, cleaning the curtains and blinds, clearing the gutters, etc.
  • Repair: This includes repairing any flaws or damage to restore the property’s original condition as it was purchased. If the damage is extensive and requires total replacement or reconstruction, such as in the case of fire and flood, the work can still be treated as repair provided that the replacement or reconstruction is comparable to the one that was destroyed.
  • Improvement: This involves adding value or enhancing the property beyond its original design, features or function, such as adding a new room, converting the ground floor to a shop, or upgrading a single-cabinet kitchen to a super-sized modern kitchen with a kitchen island.

4. Can my SMSF borrow to fund property renovations?

You cannot use borrowed funds for improvements. The SMSF can only use borrowed funds for maintenance and repairs to keep the property in its original condition as it was at the time of purchase. Improvements must be funded from the SMSF’s existing funds, not from borrowed money.

5. Are there any restrictions on who can perform the renovations?

Yes. Renovations must be conducted on an arm’s length basis. This means the work should be done by a third party, not by you or a related party, unless they are properly qualified and the terms of the work are commercial (i.e., fair market value and proper documentation).

6. Can I live in or use the SMSF property while it is being renovated?

No. SMSF properties are considered investment properties, and their use is strictly for investment purposes to benefit your retirement savings. Neither you nor any related party can live in or use the property, regardless of whether it is being renovated.

7. What documentation do I need for SMSF property renovations?

You should keep detailed records of:

These records ensure compliance with SMSF regulations, especially in case of an audit.

8. Can I claim GST on renovation costs within my SMSF?

If it is registered for GST and the property is being rented as part of its investment strategy, your SMSF may be able to claim GST on renovation costs – only those that are incurred in Australia.

9. What are the penalties for breaching SMSF renovation rules?

Breaching SMSF rules can lead to significant penalties, including fines, the SMSF being deemed non-compliant (which can result in the fund’s assets being taxed at the highest marginal rate), and potential disqualification of trustees. It’s crucial to adhere strictly to all regulations.

Given the complexity of SMSF regulations and the potential penalties for non-compliance, professional advice is highly recommended before undertaking any renovations to minimise compliance risks and optimise the tax efficiency of your SMSF property renovation strategy.

Disclcaimer: The information provided within this article is general information only.  None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.

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