My financial planner believes (but is still investigating) that if I purchase a house within my SMSF and then renovate it, under the SMSF law it changes the nature or structure of the asset which is illegal.
Can anyone shed some light or refer me to finding the answer to this. Is there a difference between renovating the house using borrowed funds or SMSF cash?
Would be interested hearing from anyone who has renovated a house or unit within their SMSF.
you cnnot renovate using borrowed funds but it is possible using cash as long as you dont change the nature of the property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
As Terry has mentioned you cannot Borrow funds using the property as security to renovate an investment property owned under a SMSF.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I recall that the ato has put out a comprehensive ruling out on what can and cannot be done with property in a smsf. I am in japan now so dont have the reference handy.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry, do you mean SMSFR 2012/1 as per here?
http://www.ato.gov.au/content/00320475.htm
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Jak. Bit hard to read on my phone but that looks like the one.
Dirdt link
law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20121/NAT/ATO/00001&PiT=99991231235958Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Off the top of my head…
1. Originally money can';t be borrowed for any renovations ( structural or cosmetics )
2. As of 12-18 month ago ?? they changed the rules…Money can be borrowed for REPAIRS only ( including structural repairs)
One of my client required a certified engineers report before they could carry out the repairs as borrowed funds.
Regards
Michael
Mick C | Shape Home Loans
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As i have said before of course there are finance alternatives which can get around the ATO regulations however not necessary for every client depending on their own position.
I am in the UK and just don't have the latest paper on the subject but will write an article on it when i get back.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I would be very wary of a financial planner that did not already know the rules surrounding the topic of renovating inside a SMSF without having to go away and research it.
As the boys have mentioned, your SMSF cannot borrow money to do a reno. So if your SMSF has money in its bank account, great. You do of course need to ask yourself if this is the best use of the SMSF funds. Either way, as Terry mentioned… you cannot change the nature of the asset…. so for eg you cannot subdivide off the back yard, or convert a house into two dwellings. From what the ATO told me, a cosmetic reno is fine, as is converting a room to a bathroom. I even read in a mag recently that a SMSF can add a granny flat to the backyard (presuming it has a large slushy fund to fund such a venture). If in doubt, ask the ATO for a private and binding ruling. And perhaps look into getting an accountant or financial planner on your team that already knows the answers to these questions. Richard and Terry have both already replied to you and know the rules inside out.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
This is a very valuable thread. A tidy package of "what on earth can a smsf do and not do", and with Terry, Michael and Richard all pitching in their knowledge
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
The property cannot be used as security for any loan. But the smsf could possibly borrow from a member without offering security. But legal advice would be needed as any stuff up could mean tjose funds could count as a contributiin.
Same with buying stuff for the project. The smsf must buy it and jave the trustees name on any invoices. Otherwise it would probably be classed as a contribution.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank You one and all, Particular thanks to JacM for providing the ATO link.
I had a big read through the Tax Ruling and can report the following. It comes down to 2 major concepts
- Repair vs Improvement and,
- a Single Acquirable Asset
Paragraph 30 gets to the heart of it
"30. Subparagraph 67A(1)(a)(i) provides that borrowings under an LRBA cannot be used to fund improvements. However, money from other sources can be used to improve (or repair or maintain) a single acquirable asset. For example, accumulated funds held by the SMSF may be used to fund the improvements.23 However, any improvements must not result in the acquirable asset becoming a different asset.24"
Thankfully the ruling is quite generous regarding the improvements that can be done to a house including adding bedrooms, adding a pool, outdoor entertainment area, garage,granny flat, etc as it is considered to NOT change the character of an asset as a whole (ie- residential house and land) – PROVIDED YOU DON'T BORROW THE FUNDS FOR THE IMPROVEMENT.
Effectively, if you have sufficient cash funds available within the fund, you can certainly renovate (improve) the property but would need to take great care in exactly what renovations you undertake. Forget all about subdividing, developing, changing the house into flats or into a restaurant etc as this definitely changes the character of the asset and is not allowed.
Before plunging in with the above info, there are 31 pages of Ruling and I have basically picked the guts out of it for my purposes so before you start you own renovations – have a very thorough read of it yourself – that was my very non-legal disclaimer! There is actually some good info there if you persist.
Again, thanks for every ones input and would still like to hear anybody else's experiences, interpretation or ideas.
Juichi, i wrote an article on the subject a few months ago in the Financial Planning Journal and will copy it to the forum once i get back from the UK.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Whilst not exactly on topic, don't forget to ensure the structure of your SMSF and bare/property trust are correct before proceeding to contract. Over the last 6 months I have dealt with many lenders who all have different rules as to who they expect the trustee of your SMSF and bare/property trust to be.
Whilst not exactly on topic, don't forget to ensure the structure of your SMSF and bare/property trust are correct before proceeding to contract. Over the last 6 months I have dealt with many lenders who all have different rules as to who they expect the trustee of your SMSF and bare/property trust to be.
Totally agree Ben had a long running arguement with an Qld Accountant recently who had told our mutual client who was buying in Qld to put the Contract in the name of the Super Fund and wouldn't budge on that.
We spent 3 weeks telling him he was incorrect and then 2 weeks before settlement he listened and we got the Contract amended and somehow had the loan approved and settled.
Needless to say he is not using that Accountant anymore.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
HI jacM and all, with your comment "cannot subdivide off the back yard". Is it possible for a smsf to invest in a Unit trust say at at 50.50 ratio ( Half cash from smsf and Half personal cash). The Unit trust to then go out and purchase a property and using the personal cash to pay for any subdivision/renovation costs ?
Hi Gemma
It is also possible to subdivide / strata title a property owning the entirely property in your SMSF.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Yes, just make sure the unit trust doesn't have any borrowings or lends money
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