Buying property ready to rent out is one thing, renovating is another thing, and developing property within your super is a whole other level.
Your Self-Managed Super Fund can be a great platform to allow you to do all three of these, however, it’s VERY important to be across all of the rules to ensure that your SMSF stays compliant and you – as the trustee of your fund – don’t run into any trouble.
Just as with renovating a property, the main issue doesn’t come from the development itself, but how you’re going to pay for it.
If you can pay for it in cash (from your SMSF) and don’t need to borrow money, go right ahead!
But for most people, there’s going to be borrowed funds involved which means playing by the Limited Recourse Borrowing Arrangement (LRBA) rules.
There’s two basic concepts that you need to adhere to when you’re borrowing funds:
Is the asset going to retain it’s identity, or will it become a different asset?
Is this is a single asset, or is it multiple assets?
Are you changing the asset?
Let’s work through a few of the common scenarios of what’s not okay:
A vacant block of land that you want to subdivide – this is clearly becoming different assets. It is not okay to purchase with an LRBA, but you could purchase with cash.
Demolish existing house and replace with strata units – nope, definitely creating different assets here.
Changing the zoning of the property, like from commercial to residential or vice versa – even if you don’t significantly alter the structure, this is still altering the purpose.
With these items, it’s not just a limitation of executing them with an LRBA.
If you bought the underlying property with an LRBA, that arrangement will be void. In fact, that’s where people tend to get themselves into trouble.
When are you making changes but not changing the identify of the underlying asset?
Adding an extension with extra bedrooms, landscaping, garage, granny flat etc – these can’t be funded with an LRBA. But if you’ve got the cash, they won’t upset the existing LRBA on the property.
If you haven’t got the cash available right now, don’t despair!
Just like you would save for a property deposit outside of super, you can do the same within the SMSF.
If you’re close to reaching the desired amount of cash, then carry on with either your salary contributions or additional concessional or non-concessional contributions. If you’re a few years off, consider using an investment strategy (or even a geared investment strategy) to get your fund up to the level it needs to be for you to do this.
SMSFs are awesome, but they’re not magic. You need to play by the rules and be patient if you have property development as a goal!
Disclaimer: all information contained within this article is of a general nature. Do not rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.