The Financial Inquiry Report has come as a jolt to the real estate aspirations of SMSF owners. It is in fact a little defeating to think about the changes that may enter the domain of the Limited Recourse Borrowing Arrangements. While SMSF owners cannot do much about the alterations that occur at this level, they can certainly make a few modifications in the way they pursue their SMSF properties.
Tax rebates on offer
As a first, it is your onus to keep the property in top shape because on this depends the time period for which the property can be rented at or above the market rate. If your SMSF property is negatively geared, you can earn substantial deductions by showing expenses and repairs. If on the other hand, you are contemplating capital improvements, you can use tax deductions on the cost, the amount of which your accountant will be in the best position to tell you.
Change in LRBA protocols
If you bought your property under the LRBA, you have to be extra careful if rules that begun since July 2010 apply to you. Here, the need to differentiate between capital improvement and repairs is paramount unless you are okay with paying penalties for non-compliance.
Capital improvement versus repair
While the Superannuation law does not come out in the open in regards to the difference, tax laws clearly cite what repairs is and what may be deemed as capital improvement. Altering the damages to a property with identical materials is termed as repairs. If non-identical materials are to be used, they can be deemed as repairs, too, if the reason established for modification is not improvement of any kind.
What you need to know?
Capital improvement comes into the picture when the established aim for the modification is not repair but an enhancement in the condition of the property. Extension, addition of a second storey, and fresh construction post the demolition of the old one are examples of capital improvement. In short, when something is restored to its original condition the modification is termed as repair and when changes made to the structure brings in a new look to it (structurally or cosmetically), it is termed as capital improvement.