Jason Hurst, technical superannuation adviser for Accurium, said as much as people love property, “they also love working on it, fixing things and improving it”.
“And what can we do to a property that’s subject to an LRBA can really be broken down into three key areas – repairs, maintenance and improvements. [You have to consider] if you are changing the asset completely, where it becomes a different asset,” he said.
“SMSFR 2012/1 has good guidance on where the boundaries may lie between whether a repair and maintenance could spill over to an improvement, or the work on the assets change it to become a different asset.”
Hurst continues that with repair and maintenance there are some general tax principles, including that work is done to fix defects or prevent damage.
“You’re really just bringing the item or the asset or part of the asset back to its original functionality. That is always allowable under an LRBA and it could be funded from borrowing if that’s part of the loan agreement, but it could also be paid for by fund cash,” he said.
“When you get to improvements, that’s where an asset is perhaps being altered for the better such as rooms added to a residential dwelling. That is also allowed provided that no borrowing is used.”
He continued that a repair and maintenance could be fixing a kitchen, but replacing it with something that is much better is probably one of the grey areas where it is “borderline repair and maintenance” and improvement.
“But as long as you are using fund cash to pay for it, it should be alright. Where it will matter is if you are doing something that is substantial, where you are basically changing the property to a different type of asset,” he said.
“For example, something like a subdivision where one block of land becomes three separate blocks, or a vacant block of land is built on. There is a fair bit of scope where improvements to a home wouldn’t make it a different asset, such as adding bedrooms, bathrooms, swimming pools – that’s usually an improvement. But if you add things to a residential dwelling, where perhaps you make it into a commercially functioning restaurant that could result in being classed as a different asset.”
Hurst added that, for example, if an SMSF trustee purchases a property with an LRBA, and sees a future opportunity by subdividing that property, they will need to wait until the loan is repaid and the asset is removed back to the SMSF before they can consider subdividing the block, or making a house suddenly become three apartments.
“However, there is substantial scope to improve the properties without borrowing ,” he said.
“The crux of it is that it’s not a different asset. If it started as a residential property, it has to still be a residential property, it’s just a much bigger and better residential property.”
