Changes to SMSF legislation will benefit property investors: Ken Raiss

Since 2007 investors have been able to purchase property in super with debt, giving them the twin benefits of leverage and concessional tax rates. Another benefit of buying in super was that at age 60 no tax is payable on either rental income or capital gains. 

What has eluded the investor, however, was the ability to practically and efficiently add value by doing a renovation. There was confusion by both the profession and the ATO in what was possible and how it is funded. 

With a stroke of the pen the ATO has clarified and simplified these elusive questions.

With the release of SMSFR 2012/1 the ATO has defined three critical areas and clearly defined what constitutes a renovation. 

In summary the ATO has confirmed that a self-managed super fund (SMSF) can borrow money to fund a cosmetic renovation, e.g. kitchen, bathroom, flooring etc. If the renovation is structural, e.g. if it moves internal walls, then the funds must come from internal SMSF cash, not borrowings. 

More technically this ruling clarifies what is a:

1. Repair
2. Improvement
3. Change to the single acquirable asset (SAA) 

Specifically:

1. Cosmetic renovation is identified as a repair by the ATO and so can be funded with debt. For tax purposes a scrapping schedule and a depreciation schedule would be completed. These costs cannot be expensed, so the use of the word repair can be misleading, but ATO has chosen to define repair differently for superannuation purposes and for tax.
2. Improvement such as moving internal walls, the addition of a granny flat, second story, swimming pool etc which does not change what the SAA is (i.e., it is still a single dwelling) can be done with internal SMSF cash but not debt.
3. A substantial improvement that alters the SAA to a point where what you end up with is not what you started with eg single dwelling into a duplex, land to land and dwelling, etc., cannot be done while there is a loan on the property/land. If there if no debt then it can be done but it must be funded by internal cash. 

Note: properly documented and financed off the plan or a single contract that includes the land purchase and dwelling construction where in both cases a deposit is paid and then final payment is made on completion is OK. 

Unfortunately the ATO has also confirmed that an existing asset in super with no debt cannot have a loan facility created against it. 

Please note that you need to have your own SMSF to purchase property direct with debt as your retail/industry fund will not oblige.

Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Ken’s experience lies in working with large publically listed multi-national companies, which gives Ken excellent insight into international market trends. Ken specialises in educating “mum and dad” property investors and small business owners with advice on wealth creation, asset protection, taxation, superannuation and compliance. Chan & Naylor offers a free five-minute question-and-answer session on its website under the "Ask the Experts" section.