The world of self managed super fund property investment has become a popular avenue for members, boasting the potential for high returns and long term capital growth.
But those already well into their asset acquisition phase may be wondering can I renovate my SMSF property?
The answer depends on a few different factors:
- The extent of the improvements
- Where the money will come from
In this article we pull apart the rules on making improvements to SMSF property and explain Limited Recourse Borrowing Arrangements LRBA. We outline the difference between repairs and renovations when it comes to SMSF law and tell you under what circumstances either can be performed.
Strict rules around changing SMSF property make amendments tricky business…
Consider if it’s really worth your effort: are improvements going to increase the return on your property?
Remember, compliance is essential: failure to follow self managed super fund SMSF rules could result in hefty penalties.
The purpose of self managed super funds is to benefit the trustees when they reach retirement age; you must not use SMSF money for personal gain in any way.
It is always worth consulting with a reputable financial advisor for clarity before making any big moves relating to your SMSF.
How You Bought Your SMSF Property Matters
Here’s your answer:
Whether or not you can make improvements to SMSF investment property has everything to do with how your SMSF purchased it.
If you purchased your SMSF property outright and it does not have a mortgage then you may use existing funds to make improvements. Subject to what it outlined in your SMSF deed, you can undertake a complete makeover of the property while still complying with SMSF property rules.
If you used borrowed monies to purchase the SMSF property, you are not permitted to use additional borrowed money to make any improvements to the property.
Cash held in your SMSF can be used to make any improvements to your SMSF property investment, as long as the improvements do not result in the asset becoming a different asset. According to superannuation law, the function of the original asset can’t be altered as a result of improvements .
Remember: you can contribute your own money to purchase a property, however, such personal contributions to your super fund cannot be withdrawn until you reach retirement age.
LRBA Explained (Limited Recourse Borrowing Arrangement)
SMSF members are generally prohibited from borrowing funds, subject of few exceptions under the super law . A Limited Recourse Borrowing Arrangement (LRBA), is one of these exceptions; it involves a SMSF trustee taking borrowed funds from a third party lender. The borrowed money is then used to purchase a single asset – including commercial or residential property – that is held in a seperate trust .
If the fund defaults, the other assets are protected. In other words, there is no recourse.
When a property is purchased in this way, no alterations can be made that change the character of the property until the SMSF property loan is paid off. Renovations that significantly change the asset will require a seperate LRBA.
Some points to remember:
- Factor in the additional fees and costs associated with an LRBA, including commissions, insurance and maintenance and weigh these up against any potential profit of making improvements.
- Borrowing rates may change and this could result in costs outweighing profit.
- There’s a chance your loan could be called early, sold to another party or the terms of the loan altered. Ensure you understand the terms of your LRBA clearly.
- LRBA rules change over time. Different rules may apply to the LRBA depending on when the arrangement was entered into.
- You are responsible for compliance for the life of the loan: failure to comply will result in significant consequences for SMSF members and fellow trustees.
Repairs Vs. Renovations
We’ve said that the extent of the improvements is a primary factor in determining if they can be done to SMSF property, so:
Can property owned by a SMSF be renovated or repaired?
Let’s look closely at the definitions of each:
“Repairs” are defined as necessary repairs to ensure the continued functioning of the property in its present state. Repairs includes maintenance to defects, deterioration or damage or reasonable actions to prevent them.
For example, replacing an equivalent fence, or installing smoke detectors as per regulations, are seen as ‘repairs’.
“Renovations” are defined as making improvements that alter the property for the better to a significant degree, including adding features to the SMSF investment property.
For example, adding a shed to the property is seen as a renovation.
Note: If the improvements are funded by the SMSF member themselves and not via the SMSF, then the value of the improvement will count towards contribution caps.
Are There Other Risks?
If the improvements to your property:
- Alter it in such a way that the original function of the property is fundamentally changed, or
- The legal rights to the property change, such as in a sub division
Then you may be in breach of the replacement asset clause of your self managed superannuation fund and subject to heavy penalties.
Many trustees are delving into the word of property investing with their SMSF.
Making improvements to your SMSF property could yield higher rental returns, protect it from foreseeable damage and improve the overall value of your asset.
But there are restrictions.
So, can you renovate a SMSF property?
That depends on how you purchased it.
If you purchased the property with a SMSF loan, then you are significantly restricted as to what you can do to it. Slight ‘improvements’ that fall under the category of repairs are allowed, but must not change the inherent character of the property in such a way that it becomes a different asset.
Yes: you can use borrowed funds to make small repairs and maintenance to your SMSF property.
Yes: you can renovate your SMSF property – BUT – you must use funds that are already held within the fund and cannot be borrowed money.
It is wise to seek the advice of a trusted financial advisor before undertaking any improvements to your SMSF investment property.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor before undertaking any improvements to your SMSF investment property to ensure compliance with your fund and the SIS Act.
 Australian Taxation Office, 2023, Limited Recourse Borrowing ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/in-detail/smsf-resource/smsf-technical/limited-recourse-borrowing-arrangments-questions-and-answers/limited-recourse-borrowing
 Australian Taxation Office, 2023, SMSFs Investing in Property https://www.ato.gov.au/newsrooms/smsf-newsroom/smsfs-investing-in-property
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