If you have purchased a property within your Self-Managed Super Fund (SMSF) using a Limited Recourse Borrowing Arrangement (LRBA), you might be wondering whether you can carry out major renovations to enhance the property. The rules around this are strict and set out by the Australian Taxation Office (ATO) in SMSFR 2012/1 and getting them wrong can put your SMSF in breach of superannuation law.
What You Can Do with Borrowings
Under LRBA, borrowed funds can only be used for:
- Repairs – fixing damage or defects to restore the property to its original state (e.g., replacing a roof damaged by a storm, repairing fire damage to a kitchen).
- Maintenance – work that prevents deterioration and keeps the property functional (e.g., painting walls, replacing worn fences, renewing an outdated kitchen with modern equivalents).
These works are allowed because they don’t fundamentally change the character of the property.
What You Cannot Do with Borrowings
Major renovations that significantly improve or alter the property cannot be funded with LRBA borrowings. Examples include:
- Adding a second storey, new rooms, or additional bathrooms.
- Constructing a granny flat, swimming pool, or pergola.
- Converting a residential property into a commercial property or multiple strata-titled units.
Such works are classified as improvements, and LRBA rules prohibit borrowed funds from being used for improvements. Doing so could cause your SMSF to breach section 67A of the SIS Act.
How Major Renovations Can Be Done
While you can’t use borrowings for major renovations, you may proceed if:
- You fund the renovations using SMSF’s own cash resources (contributions or accumulated earnings).
- The renovations don’t transform the property into a different asset type (e.g., it must remain residential if originally purchased as residential).
- It doesn’t result in a different asset being held (for example, converting a house into a block of units would breach LRBA rules).
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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