Renovating the borrowing in super laws…

The rules, which allow for members to borrow funds within their self managed superannuation fund to purchase a single asset, typically a property, will now allow members to ‘value add’ and increase its worth. This is a landmark change which will have significant positive implications for investors keen to maximise their super.

The benefit of borrowing within super is twofold –

1. It allows younger people to access their superannuation balance to gain property exposure from a younger age. But beware – the property must be purchased at arm’s length. This means the property cannot be purchased from a related party, such as a family member, or yourself personally. Furthermore, the individual cannot live in the property at any stage!
2. It allows people approaching retirement age to potentially quarantine any future capital gains tax (CGT) obligations in the tax free environment of superannuation.

As the rules currently stand, once the property is purchased within the fund, improvements, such as renovating the bathroom, cannot be made to the property.The ATO’s draft ruling is set to change this.

The draft ruling states that improvements can now be made to properties within superannuation, so long as the funds used to improve the property come from within the fund itself and are not borrowed.

This essentially means that SMSFs can use borrowed funds to purchase a property, however they must use cash flow from within the fund to carry out improvements.  It means investors can purchase a property and improve its rental capability by renovating the kitchen, or adding an additional bedroom.

In instances where repairs are needed, borrowings can be used to fund the work. This would include such things as fire damage or replacement of gutters.

However, before the developers out there get carried away, the draft ruling does not allow for the development of a piece of land, for instance, knocking down an old house and building a block of flats. It states that the improvements must not fundamentally change the nature of the investment’.

Thus far, the current rules have made it more difficult to source appropriate properties for investors looking to borrow in super. However, the ability to add value to a property via capital improvements is a key attribute to a property purchase in my view.

Assuming the draft ruling becomes law, it’s a step in the right direction for SMSFs and borrowing.