SMSF Property Investment – Repairs or Renovations?
When a SMSF takes out a loan for a SMSF property investment, the borrowing is a limited recourse loan. This means that the acquired asset is the only asset that can be used as security.
Because the rights of the lender are limited to the rights relating to the single acquirable asset (or a replacement in limited instances) no money can be used to improve the asset if it results in a different one.
The ATO recently provided some clarification for those who have borrowed for a SMSF property investment.
The update means that those who had planned renovations or repair work on the SMSF property investment, now have a better understanding of whether borrowings can be used to pay for the work, depending on whether the work is ‘maintenance’, ‘repair’ or ‘improvement’.
For instance, work to repair damage to the property with similar materials and to a similar standard, counts as repair and borrowings can be used to finance the work.
However, if improvements are made at the same time, they cannot be paid for by borrowings.
An example is a fire that destroys a kitchen. To replace the kitchen to the same standard, using modern equivalent materials, counts as a repair.
Deciding to expand the kitchen at the same time, counts as an improvement. Small additions such as installing a dishwasher where there wasn’t one before can still be called a repair.
If a SMSF owns a property that is debt free, can it borrow to fund repairs and maintenance to the property? No, the SMSF is only able to borrow to repair or maintain the property if the property was acquired under a limited recourse borrowing arrangement and the borrowing is still on foot.
When borrowing for a SMSF property investment using a limited recourse borrowing arrangement, it is possible that repairs and maintenance could be considered an improvement to the asset.
This update sets out to clarify a very important distinction, as improvements can change the state or nature of the asset to such an extent that it may be considered a different asset to the single acquirable asset, subject to the borrowing arrangement.