Repairing or Improving a Property

Repairing a property is allowed however you can only improve a property if certain conditions are met.

Repairing/Maintaining a Property

S67A(1)9a)(i) prohibits borrowing money to improve an asset, SMSFR/2012/1 (“Ruling’) provides the guidelines which are based on ordinary meanings of distinguishing between a improvement and a repair. The Ruling, provides some examples:

Using the SMSF’s own money to improve a property under a SMSF Loan

Whilst improvements are <not allowed using borrowed funds>,  the ATO accepts that it is possible for a SMSF to use money from other sources to fund improvements to a property subject to a SMSF Loan provided the improvement is not significant to make the acquirable asset a different asset.

What makes improvements change the asset into a different asset is a question of fact not law, factors that you should consider are (1) whether the asset has been replaced (2) whether the functionality has changed and (3) there is no longer a single acquirable asset, i.e. one title becomes more than one title (exceptions apply). These factors are best demonstrated by examples provided in SMSFR 2012/1 table2:

Different Assets (not allowed)

• Vacant block of land subdivided into two
• Vacant Block of land single title – house built on vacant block
• House demolished and replaced with improved asset or multiple dwellings (group or strata title)
• Land and residential house, house converted to a restaurant
• farm land – a four bedroom built to be rented to unrelated parties

Same Assets (allowed)

• Land and Residential House, one bedroom converted to home office
• Land and Residential House, House destroyed in for and superior house built to replace
• Land and Residential House, House extended to add bedrooms, swimming pool, pergola, garage, granny flat
• farm land – A large shed built 
• new title issued due to resumption of land by a local or state authority
• commercial property extensions mad to meet needs of a tenant