Q: Can you explain the recent ATO ruling allowing people holding property inside their SMSFs to make improvements to the properties rather than just maintain them?

A: On 15 September this year, the ATO released a draft ruling that will allow Self Managed Superannuation Fund (SMSF) investors who have borrowed (geared) to buy property to renovate investment properties within their Superannuation funds.

Trustees of SMSF funds were previously unable to maintain or improve the value of geared property. Trustees were limited to ongoing repairs and maintenance such as replacing broken windows. Renovating a kitchen or bathroom was a no no. Hence the property market for SMSF investors has been largely limited to off the plan developments or newly built properties.

Key points to be aware of:

Money cannot be borrowed to fund the renovations. Renovation costs must be met from assets of the Fund.

The nature of the property cannot change i.e. you cant develop a site or convert a house to units for example.

The entire ruling SMSFR 2011/D1 can be downloaded from the ATO website. The ATO is accepting submissions for public comment up until 28 October before issuing a final ruling. E-mail dennis.bird@ato.gov.au to make a submission. If the ruling goes through, it will apply to all geared properties settled on or after 7 July 2010 or properties purchased prior to this date that are refinanced.

The new ruling appears to make sense as it will allow Trustees to maximize the return on their properties through enhancing the rent ability and likely future sale value.

Whilst this new ruling is welcome news to many SMSF investors, especially those affected by recent natural disasters, you will need to do the numbers on any project carefully. The results for the contestants on the TV reality series :”The Renovators” is a salient warning for anyone considering renovating a property for profit!

This article was published in The Australian on 15 October 2011. A direct link to the article can be found here.

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