Since the rules around SMSFs and borrowings were confirmed in 2012, using superannuation to borrow and buy a property has remained a steady investment choice for many.

Between 2013 and 2018, investments with limited recourse borrowing arrangements increased from 5.7% to almost double at 10.2%. This reflects an acceptance of the product even when the banks are making them less accessible. However, the sole remaining ‘grey’ area is - what can you actually do to the property while it has a mortgage registered against it? While property development may be a no-no, understanding what you may do to improve the property can offer many opportunities.

An SMSF cannot use borrowings to fund improvements on a property. However, money from existing cash in the Fund may be able to be used, so long as the improvements do not result in the property becoming a ‘different asset’. Some of these changes are obvious:

  • succession planningSubdividing vacant land – one block of land becomes multiple blocks of land
  • House being built on vacant land – vacant land becomes a house
  • Conversion of a residential house to a commercial property (ie a doctor surgery, restaurant, etc)

All of these result in a ‘different asset’ being held, and cannot be done while there is a mortgage registered on the title.

The confusion arises around less significant improvements. The main point to remember is that the asset itself has to remain the same. So, if it is a residential house, and remains a residential house, then the following improvements might be able to be made:

  • An extension to add additional bedrooms
  • New kitchen or bathroom/s SMSF and property
  • Adding another story
  • New swimming pool
  • New garage, shed, or driveway
  • Construction of a granny flat

What does this mean for people interested in a ‘fixer-upper’? It might be able to be done, but it is important that the structure is properly understood, and the plans for the property are reviewed before anything progresses. The SMSF needs to be careful it has enough cash to fund the improvements and ensure there is still cash available to fund the day to day expenses of the SMSF. 

There is also a lot of complexity around whether the trustees can perform the work personally, this is something to consider before getting started. Getting it wrong can be an expensive headache – not what is wanted during a renovation!


If you have any questions regarding SMSF and property, get in touch with your local RSM expert.


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