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SMSF Property Renovation

The ATO says a SMSF can buy a property using a loan which is defective, damaged or suffering deterioration.  The fund is able to make ‘initial repairs’ (or restoration), noting that if the deterioration is severe then renovation may be regarded as a different asset (for example replacing a window or a broken floor tile vs. major renovation of  a ‘trashed’ house).  

These improvements must all be done with other than borrowings used to improve the asset.  The SMSF Loan cannot be used to improve the single acquirable asset (but the SMSF cash can be used).
The following are allowed as improvements without resulting in a different asset:
  • An addition of a new pool or new garage
  • The addition of a second story on a house, rather than simply replacing a roof
  • With farmland, additional fencing, dams, bores or tanks were installed
  • A house burnt down by fire and re-built with insurance proceeds (restored as the same asset)
The following are not allowed as they would result in a different asset:
  • Subdivide a vacant block of land
  • Renovate (i.e. bathroom) using borrowings
  • Develop a vacant block of land
  • Demolish a house and build a bunch of townhouses
  • Property rezoning -  residential to commercial or commercial to residential
  • A house burnt down by fire and rebuilt as a different type of building (for example, a commercial property or two residential units)

How can I use SMSF to develop or renovate?

You may use a SIS Regulation 13.22C relating to trust arrangement to undertake some of these activities.  An SMSF is the contributor of the capital with cash and borrowings, and you could consider using an ungeared unit trust as the purchaser & developer (refer to SIS Regulation 13.22C relating to trust arrangement).
 
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