What You Can and Can’t Renovate in an SMSF Property
- Jaeneen Cunningham
- Jul 7
- 4 min read
Property remains a popular asset class for Self-Managed Superannuation Funds (SMSFs). It offers long-term capital growth, steady rental income, and tax benefits. But there’s a catch: you can’t just treat it like a normal investment property.
Renovations, in particular, are governed by strict rules—especially if the property was purchased using a Limited Recourse Borrowing Arrangement (LRBA).
This article explains:
What renovations you can and can’t do
The key difference between repairs and improvements
What the law says
Common renovation mistakes SMSF trustees should avoid
Can I Renovate Under an LRBA: What’s the Big Deal?
When an SMSF borrows to buy a property (via an LRBA), it can’t use the borrowed money to improve the property—only to repair or maintain it.
This rule exists under the Superannuation Industry (Supervision) Act 1993 (SIS Act), which states that the asset acquired under an LRBA must remain “the same single acquirable asset.” If you fundamentally change the property’s nature or purpose, you breach the law.
In contrast, if the SMSF purchases the property outright (with cash), there is much more flexibility to make improvements—as long as the fund remains compliant with other SMSF rules.
Understanding the Difference Between Repairs and Improvements
The difference between a repair and an improvement is critical—especially under an LRBA. Here's how to tell them apart:
✅ Repairs and Maintenance (Allowed)
Repairs restore something to its original state. Maintenance keeps the property in good working order. These can be paid for using SMSF funds (but not borrowed funds directly).
Examples:
Fixing a leaking roof
Replacing a cracked window
Painting faded or flaking walls
Replacing a broken hot water system with a similar one
These works do not change the character or function of the property, so they’re generally allowed.
❌ Improvements (Not Allowed Under LRBA)
Improvements enhance or upgrade the property, add value, or change its purpose or layout. These can’t be funded while an LRBA is in place.
Examples:
Adding a new bedroom or bathroom
Installing a swimming pool
Upgrading the kitchen with high-end appliances and stone benchtops
Subdividing the property
Replacing a carport with a garage
Even if the SMSF has cash on hand, no improvements are permitted on a property under an LRBA until the loan is fully repaid.
What You Can Renovate in an SMSF Property
✅ If Purchased With Cash (No LRBA)
Repairs and improvements are allowed
You can knock down and rebuild, add rooms, or upgrade kitchens and bathrooms
All works must align with your investment strategy
The sole purpose must still be to provide retirement benefits
Must comply with arms-length transaction rules
✅ If Purchased With an LRBA
Repairs and maintenance only
Cannot use borrowed funds for improvements
Cannot change the property’s character, layout, or use
Once the LRBA is paid out, improvements are allowed
Common Renovation Mistakes to Avoid in Your SMSF
1. Confusing Repairs with Improvements
Many SMSF trustees assume that all renovations are the same. They’re not. For example:
Replacing a worn benchtop = repair ✅
Installing a larger, redesigned kitchen = improvement ❌
Always consult a professional before undertaking any work.
2. Using Borrowed Funds to Improve
It’s illegal to use LRBA funds for improvements. Even if your SMSF has a cash buffer, the renovation may still breach LRBA conditions if it alters the asset significantly.
3. Hiring a Related Party Without Market Terms
Using your brother’s building company or doing the plumbing yourself may seem convenient—but unless the work is at arm’s length, it can breach super rules.
Tip: Always use third-party, qualified trades and document all contracts and quotes.
4. Improving Before the Loan Is Paid Off
Many trustees start renovation plans too early. You must wait until the LRBA is extinguished before you improve a property. Repairs are okay, but improvements must wait.
5. No Written Investment Strategy
Renovations must fit your SMSF’s investment strategy, including asset allocation and risk tolerance. If you haven't updated your strategy since purchasing property, do so before planning any works.
Practical Examples
Scenario | Allowed Under LRBA? | Reason |
Repainting interior walls | ✅ | Maintenance |
Replacing a cracked tile | ✅ | Repair |
Adding an ensuite to the master bedroom | ❌ | Improvement |
Installing a deck for outdoor entertaining | ❌ | Improvement |
Replacing a damaged fence like-for-like | ✅ | Repair |
Replacing all carpets with floorboards | ❌ | Change in character |
After the LRBA Is Repaid
Once your SMSF has repaid the loan in full, you’re no longer bound by LRBA restrictions. At this point, the SMSF can:
Subdivide land
Renovate kitchens and bathrooms
Add rooms or extensions
Rebuild the property entirely
However, these actions must still:
Follow the fund’s investment strategy
Comply with the sole purpose test
Be properly documented and completed at market value
Should You Renovate at All?
Renovating under an SMSF is not always the best move. Consider:
Will it improve the rental yield?
Does it increase risk or lower liquidity?
Will the cost reduce diversification in your SMSF?
In many cases, trustees may be better off investing in property that requires minimal intervention, especially under an LRBA.
Final Thoughts
Renovating SMSF property can add value—but only when done correctly. The rules are clear:
Repairs and maintenance are fine
Improvements are off-limits during an LRBA
All work must align with SMSF laws and your investment strategy
If you're unsure whether planned work counts as a repair or an improvement, it’s best to seek professional advice. Engaging an SMSF specialist or mortgage broker experienced in LRBA rules can save your fund from costly mistakes and potential ATO penalties.
Need help with SMSF lending or renovation compliance?
Speak to an expert mortgage broker like Etairos Finance or SMSF advisor before picking up the tools or hiring a tradesperson. Peace of mind starts with professional guidance.
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