Renovating SMSF property: can I do the work myself?

If your SMSF owns property, it can be tempting to treat it like any other property you own. After all, if a property needs repairs, renovations or improvements, why not simply roll up your sleeves and get the job done? But before you pick up the tools, it's important to check the super rules.

SMSF-owned property is subject to a strict set of super rules. Something that might seem perfectly reasonable from a property owner's perspective can sometimes create unexpected compliance issues for the fund. 

In fact, some of the most common SMSF property mistakes arise when trustees or other “related parties” (such as relatives, business partners and companies or trusts connected to fund members) contribute something of value to a property without realising there are rules that need to be considered first.

Here are three situations we’ve recently come across.

“We’ve already done the work. Can the SMSF claim it?” 

A trustee asked whether we had been claiming “capital works deductions” for their SMSF’s property. These are tax deductions that recognise the gradual wear and tear of the building itself, such as its structure and permanently fixed parts.

When we explained that we hadn’t been doing so but could investigate it if the appropriate reports were available, they mentioned that they had spent around $200,000 renovating the property.

There was just one problem: they had paid for the renovations personally and the work was already finished.

The trustee’s intention was understandable. They wanted to improve the SMSF’s property and save the fund the hassle of paying for the work.

But SMSF assets belong to the fund, not the members personally. There are rules around members and other related parties providing money, labour, materials or other benefits to an SMSF.

We’ve previously explained what trustees can legally do to enhance the value of an SMSF property. However, it’s important to remember that strict rules apply, and getting them wrong can result in significant tax consequences and compliance issues for the fund. 

For example, only very specific types of assets can be acquired from members or other related parties but building materials isn’t one of them. In addition, where an SMSF acquires an asset for less than market value in a “non-arm's length arrangement”, the fund may be exposed to the non-arm's length income (NALI) rules. This can result in rental income from the property and any future capital gains on its disposal being taxed at the highest marginal tax rate of up to 45%, rather than the usual 15% tax rate that applies to super funds. A fund can still have NALI even when the fund is paying pensions and has income that would usually be exempt from tax. 

“The tenant paid for the fit-out, so we gave them six months’ rent free” 

Another situation involved an SMSF-owned commercial property leased to a trustee's son. When asked why the tenant had been given six months’ rent free, the explanation was that the son had spent around $200,000 fitting out the premises.  

The trustee's reasoning seemed straightforward. The fit-out had significantly improved the property and increased its value, so providing a rent concession was viewed as a fair way to compensate the tenant for the cost. 

From a commercial perspective, that might sound reasonable. The difficulty is that SMSFs must deal with related parties on arm's length terms, just as they would with an unrelated tenant. 

In this case, the tenant had effectively provided a benefit to the SMSF by funding improvements that became part of the building and increased its value. At the same time, the SMSF had provided a significant rent concession in return. 

The key point is that arrangements that make perfect sense within a family relationship won’t necessarily satisfy the super rules. Before agreeing to reduced rent, rent-free periods or tenant-funded improvements, it's worth checking the rules or obtaining advice first. 

“I’m a builder. Surely I can do the work myself?”  

What if the trustee has the skills to do the work? 

Another trustee we spoke to is a builder and had an old, run-down beach house owned by their SMSF. They were planning to demolish and redevelop it themselves. 

It’s easy to see the attraction. Why pay someone else to do work you can do yourself? 

But being qualified to carry out building work doesn’t mean you can automatically provide those services to your SMSF for free. 

There is an important distinction between carrying out ordinary trustee duties or minor activities to maintain an existing asset and undertaking substantial work that improves or redevelops an SMSF asset. 

A major redevelopment is very different from fixing a leaking tap or doing a small amount of routine maintenance. 

As we explain in our article on enhancing SMSF property value, the rules need to be considered before the work begins. 

The common theme

In each of these examples, the trustee wasn’t trying to deliberately break the rules. They were trying to improve the property, save money or make a commercial arrangement work.

The problem was treating an SMSF-owned property like a personally owned property.

Whether it’s your money, your labour, building materials or a tenant-funded improvement, anything that adds value to an SMSF property needs to be considered carefully before it happens. 

What you can do about this 

If you've already completed the work, don't panic. But it will be important to seek advice from an SMSF specialist to work through the transactions that have been undertaken and if any further action should be taken.

It's also important to remember that if the work has increased the property's value, the member who paid for or carried out the work may be taken to have made a contribution to the SMSF. Importantly, the contribution is generally measured by the increase in the property's value, not the cost of the work itself. 

That may not be an issue if the member is eligible to contribute and has plenty of room under their contribution caps. But where contribution rules or caps become a problem, further action may be required. 

So if you’re thinking about renovating, improving, redeveloping or even doing some of the work yourself, pause before picking up the tools. 

A quick check with your SMSF adviser before the work starts is usually much easier than trying to fix a problem afterwards. 

You might be interested in… 

• A guide to property investing with a Self Managed Super Fund (SMSF)