What You Can and Can’t Renovate in an SMSF Property

When it comes to making changes or improvements to an SMSF property, there are strict rules and regulations that must be followed.

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.