Some investors have misconstrued the Australian Taxation Office's (ATO's) decision to allow self-managed super funds (SMSFs) to renovate older residential housing, according to Peter Townsend, managing director of Townsends Business & Corporate Lawyers.
According to Townsend, maintenance and repairs, which are tax deductible within clear criteria, have always been allowed; however, many trustees seeking favourable tax treatment for work completed have missed the point that renovations can only occur for ungeared property.
"Some SMSF trustees borrowed money to buy an older property and are stuck with a deteriorating asset on which they cannot carry on renovations," he said. "The ATO has given no indication that the rules on renovating older properties will be changed to allow geared residential properties to be renovated."
Townsend said that having the capacity to buy a property freehold and then renovating it to add significant value was more in the realm of wealthier SMSFs where cash was available to make that large capital purchase.
"SMSF trustees wanting to add wealth with renovation strategies need to ensure that sufficient cash is available and that contributions (if needed) can be made to finish the renovations," he said. "The sole-purpose test has to be observed in any transaction inside superannuation, and the usually long-term nature of the renovation process has to be shown to fit that test.
"The sole-purpose test demands that superannuation is used to benefit the member in retirement, not when the property market comes good."
