Avoid renovation/development in SMSF

Avoid renovation/development in SMSF

SMSF Property Renovators beware!!

SMSF Trustees who intend to renovate their Fund’s real estate need to be aware of a few traps in addition to the restrictions surrounding renovations to geared property. Minor work may be ignored though what constitutes minor is unclear. SMSFR 2010/1 para 75-76 describes the scenario of an accountant completing a return for their own Fund without charge. Because of the minor value of the work involved this was not a contravention.

If the work is major then SMSFR 2010/1 para 29-32 & para 207-207 indicates that its unpaid market value will be regarded as a contribution. Care must therefore be taken to ensure that the market value of the work performed is considered in the light of possible ramifications including the breaching of contribution caps. Alternatively the market value of the work should be charged to the Fund.

This creates another possible problem as work charged on a labour and materials basis may cause the Fund to breach the prohibition of the acquisition of an asset from a related party rule (S66). To avoid this the Fund must purchase the materials directly. This could possibly be via an associated party if they are acting under a written authority as agent for the Fund. An exception is where the goods are of insignificant value, SMSFR 2010/1 para 57-59, as it’s acceptable for an associated party to supply tap washers but not to supply the materials to build a house.

If the Trustee makes suitable arrangements for the Fund to purchase the necessary materials and determines the market value of their own work, if significant, to be paid or regarded as a contribution they may still be in breach. Section 17B of the SIS Act states that the Trustee can only be remunerated if the Trustee is “appropriately qualified, and holds all necessary licences, to perform the duties or services” and “the trustee performs the duties or services in the ordinary course of a business, carried on by the trustee, of performing similar duties or services for the public”.

Therefore the Trustee must be a registered builder if they are to perform significant construction work as envisaged above. A solution could be for the Trustee to appoint another, under an enduring power of attorney, to act in their capacity as trustee for the duration of the project. In summary any Trustee who is considering carrying out major renovations to their Fund’s property on their own behalf should seek specialist advice to ensure that they deal with the potentially major problems arising from the legislative detail. Seek proper legal advice before pursuing renovations in a SMSF

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