Compliance, Contributions, Property

Property improvements a cap risk

Property assets Improvements Contributions Contribution caps SMSFs

Changes to property assets in an SMSF are likely to be considered contributions to the fund as they meet the definition of a contribution under taxation law.

A technical specialist has warned SMSF trustees that modifying assets held within a fund may inadvertently lead to a breach of their contribution caps.

BT Financial Group advice strategy and technical specialist Tim Howard noted he had observed situations where a trustee had sought to make improvements to assets such as property held by the SMSF.

Howard pointed out the provisions of ATO Taxation Ruling 2010/1 would likely treat such changes as a contribution, as they constituted “anything of value that increases the capital of a superannuation fund”, which satisfies the definition of a contribution under the ruling.

“One thing that comes up often that members of SMSFs might look to do is where they indirectly increase the value of an asset by doing such things as improving, renovating or making changes to an asset themselves, using labour, goods or building products to take what might have been [an unimproved asset] and making it a much more improved asset,” he told attendees of a BT Financial Group technical webinar held last week.

“In doing that, where the SMSF hasn’t purchased the materials, where the SMSF hasn’t paid the expenses for the labour involved in improving that asset, that increase in value the members may have created around that asset can also be treated as a contribution to the fund.”

He further illustrated his point by providing an example of an SMSF that had entered into an agreement with a related party to lease a business real property of a commercial nature.

“You might have a situation where if it’s a shopfront, if it’s a factory, there might be fixtures and fittings that need to be installed,” he said.

“As a general comment, when you are making permanent changes for fixtures and fittings of an asset, those permanent fixtures become part of that asset and may result in the value of that asset increasing.

“[It] needs to be attributed to something and would end up being attributed in some cases to being a contribution to the fund as well.”

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