Restoration or renovation? There’s a big difference when it comes to SMSF borrowing
SMSF borrowing rules allow for the fund to purchase and restore a property, but they are different when it comes to property improvement, warns a leading technical expert.
Nicholas Ali, executive manager of technical support for SuperConcepts, said in the latest SMSF Explained podcast that there is a definitive ruling in the SMSF landscape that helps funds know the difference between restoration and renovation, which should be followed to avoid any penalties that could be imposed.
“The seminal ruling on this is SMSFR 2012/1, and that gives us an idea of what is the difference between restoration and improvement,” he said.
“To paraphrase that ruling, restoration is returning something back to the way it was, so returning it back to its original form and function.
“If we look at a house that was subject to a limited recourse borrowing arrangement, which had a white picket fence, which was now decrepit and dilapidated, and the SMSF trustees used some of the borrowings to restore that fence back to what it was, that is what you would term a restoration, which is allowed using borrowed monies.
“The other thing might be a kitchen that needs to be refurbished, but you would have to replace like for like, so you couldn’t knock out any walls or put in different cabinet styles. It would have to be put back that it was to use borrowed funds.
“Contrast that with improvement, which would be using funds to improve the kitchen, so knocking down a wall or replacing the old laminate top and bench covers or replacing all the cabinets with new to glossy and putting in a bigger oven, a better oven.
“That would be seen as an improvement. The super fund can still do those improvements to a property that’s subject to a limited recourse borrowing arrangement, but it could not use borrowed funds. It would have to use its own resources.”
Mr Ali said the SMSFR 2012/1 is a perfect example of improvement versus restoration as it also looks at an improvement that has changed the nature of the asset.
“You can’t change the asset to such an extent, even with an improvement, using the fund’s own resources to such an extent that it is a different asset,” he said.
“The ruling says you could put a pool into a property; that’s not changing the nature of the property. It’s still one house on one title.
“But that contrasts [with] knocking down the house and putting in two-bedroom townhouses. Yes, that’s a big improvement, but it’s to such an extent that it’s a different asset. It’s no longer one house on one title, but two, two-bedroom townhouses on two titles.”
