Super property: Repair or improve

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Trustee responsibilities

Just like all property owners, self-managed superannuation funds investing in real estate are not immune from the ravages of flood, fire or general wear and tear.  The superannuation fund rules require the trustees to keep the property in good order and condition so it can be rented for the maximum time possible. 

In addition, any insurance cover for the property should be up to date just in case a catastrophic event occurs. Failure to properly look after any real estate owned directly or indirectly by the fund could mean that retirement savings ends up sliding backwards. 

Tax deductions

Self-managed superannuation funds that own property directly may access tax deductions for the cost of any repairs. In addition, if the modification to the property is a capital improvement, tax deductions may be available for the cost depending on the circumstances. 

In some cases the improvement may be eligible for a capital allowance, such as depreciation, or where this is not available the cost of the capital improvement may be added to the initial cost of the property when calculating any capital gain or loss. 

Limitations

In contrast to the direct ownership of the property, some self-managed superannuation funds may have purchased real estate under a limited recourse borrowing arrangement.   

There are two sets of rules that apply to these arrangements – one set applies to those commenced from September 2007 to July 2010, and the other applies from July 2010.  Under the earlier arrangements the cost of repairs and capital improvements can be made to the property without any issues.   

However, from July 2010 stricter rules apply which mean it is not possible to make capital improvements to the property without coming across compliance issues and exposing the fund to penalty. This means it is important to understand the difference between a repair and a capital improvement. 

What constitutes a repair and a capital improvement is not as easy to determine for superannuation purposes as you may think. The superannuation law does not provide any detail of the difference between the two. However, the tax law gives us a clearer idea when the work done may be considered a repair and other times when it is a capital improvement. 

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