From my interpretation of the rules surround SMSF's and borrowing to buy Property.
- A SMSF by using a limited recourse borrowing arrangement (LRBA) can borrow to purchase a property (generally with a 30% deposit)
- A SMSF may use a LRBA to purchase a ‘single acquirable asset’
- Its OK to use Borrowed money to repair and maintain a property
- Its NOT OK to used borrowed funds to improve a property.
- Once the loan is repaid the asset can be transferred out of the LRBA and the LRBA restrictions are removed.
Improving a property is anything like renovating it, adding an extra level, granny flat or subdividing and building another town house next door.
But what if I'm using my own funds, can I improve my Property? Yes (But with some restrictions). Straight from the horse's mouth (AKA the ATO)
Subparagraph 67A(1)(a)(i) provides that borrowings under an LRBA cannot be used to fund improvements. However, money from other sources can be used to improve (or repair or maintain) a single acquirable asset. For example, accumulated funds held by the SMSF may be used to fund the improvements. However, any improvements must not result in the acquirable asset becoming a different asset.
What you can't do to a property in a SMSF held under a LRBA regardless, if you are using your own funds or not is:
- Buy a block of land, then at a later date decide to buy a house or 2 on it
- Significantly change the nature of the property i.e. convert the property to commercial premises, i.e turn a house into a restaurant.
-Subdivide it, or sell off a portion of the land
what you can do to your house using your own funds
- add extra bedrooms, add a pool, patio, outdoor area, add a shed and even add a granny flat.
- granny flats are OK the wording form the ATO is as follows
"A 'granny flat' is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage.
The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset."
a table of what is and isn't permitted by using your own funds is under section 35 of the attached link.
http://law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20121/NAT/ATO/00001
Essentially you can improve your property using your own funds as long as your house remains a house. you definitely can't subdivide it or sell off a portion of the land whilst it remains subject to a LRBA