DIY super tax ruling on renovation tipped to make property investing more attractive

A draft Tax Office ruling allowing self-managed super funds to renovate and upgrade properties should make property an even more attractive asset for DIY funds to hold.

The ruling to be released today will allow renovations to properties held in SMSFs as long as the money comes from within in the fund (it cannot be borrowed) and the renovation does not fundamentally alter the nature of the property.

Previously the ATO has ruled that SMSFs could not borrow money from any sources to improve their properties.

Liz Westover, head of superannuation at the Institute of Chartered Accountants, says the draft ruling provides “much-needed clarity and is a long time coming”.

“It is much more sensible approach,” she says.

She says the ruling on improvements is welcome given that real estate assets are usually held for a long time.

“Over 20 years you will probably want to put in a new kitchen or bathroom. Now you can fund these improvements using other assets in your fund,” she says.

The ICA has been in discussions with the ATO over borrowing clarifications and says the draft ruling provides examples of what constitutes an allowable improvement.

The institute will support the draft ruling.

Westover acknowledged Australia’s love affair with property, but cautioned SMSFs that the potential of the investment is what matters: “You still need to look at the quality of the investment, not simply that you can borrow to acquire real estate.”

The draft ruling also has the support of the SMSF Professionals’ Association of Australia (SPAA), with national technical manager Peter Burgess telling the Australian Financial Review: “This change will mean that property is now a more attractive option than it was previously.”

Figures released by the ATO over the March quarter found SMSFs invested an additional $500 million in direct real estate.

This increase coincides with the appeal of DIY super funds continuing to grow, with $3 billion added to SMSFs over this period, taking the total invested to $418 billion held by 7,500 funds.

The Tax Office has also clarified rules around borrowing to repair property. SMSFs will be able to borrow to undertake repairs as long as it does not change the character of the dwelling.

The draft ruling also provides clarity over the definition of a single acquirable asset that can be acquired under limited recourse borrowing.

“The previous view of the ATO was that one title equates to one asset. In reality this does not always work. For example if you have an apartment with a separate car park, you might have offended the rules. Now holding that type of asset should be okay,” she says.

“You can now have one structure over a number of titles. As an example, previously, banks would not lend on factory over three titles,” she says.

This article first appeared on Property Observer.