SMSF property renovations

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.