What you can and can’t do to your Self Managed Super Fund property under a Limited Recourse Borrowing Arrangement

For many, what draws them to self managed superannuation is the attraction of being able to utilise their super balance and borrow money to purchase a property. After all, a Self Managed Super Fund (SMSF) is the only retirement vehicle that allows its members to hold real property within their fund.

However, it often comes as a surprise that the ability to do this is in fact an exception to the rule. That rule being that super funds cannot borrow. It has only been since late 2007 that it became possible for an SMSF to borrow to purchase an asset. And the only way to validly do this, is via a limited recourse borrowing arrangement (LRBA).

LRBA’s come with a number of requirements that not only need to be met when they are initially established, but for the life of the borrowings. Many are not aware of these and assume borrowing in their SMSF is the same as if they did so in their personal name. Failure to adhere to these additional requirements can result in the breach of the LRBA which can have significant consequences for the trustees and the SMSF.

This article looks as at some of the criteria that are required to maintain a successful LRBA and how they relate to activities involving property investment.

The particulars of the arrangement that will be examined include the following:

  • Concept of ‘repairs and maintenance’ vs ‘improvements’ of a property and how these can be financed when a property is under an LRBA.
  • The asset for which the LRBA is established must not be replaced. If replaced, the LRBA no longer exists. The tax office has cited a number of situations where a property will be considered to have been ‘replaced’.
  • A LRBA can only be used to purchase a ‘single acquirable asset’. This will be explored in relation to real property.

Repairs & Maintenance can be financed by borrowings for a SMSF property

Improvements to a SMSF property must be financed by existing SMSF monies (not borrowings)

What are considered ‘Repairs & Maintenance’ in regards to a SMSF property?

  • ‘work done to prevent defects, damage or deterioration of an asset, or in anticipation of such things.
  • The work must merely ensure the continued functioning of the asset in its present state.
  • A repair merely replaces a part of something or corrects something that is already there, that is now worn out as a result of normal wear and tear, or is damaged accidentally or deliberately, or by natural causes.
  • A repair is ‘occasional & partial’.

What are considered ‘Improvements’ in regards to a SMSF property?

  • A property is ‘improved’ if its state or function is significantly altered for the better, through substantial alterations, or the addition of further substantial features to the property.
  • There are ‘alterations’ that may be done to the property that don’t amount to an ‘improvement’. Alterations do not constitute an improvement if the asset is ‘only bettered to a minor or trifling extent as compared to the asset as a whole’



Here are some practical examples to help understand these definitions:

Scenario Repairs & Maintenance – can be funded by borrowings Improvement – funded by SMSF monies only
Fire damages the kitchen in a residential property, including the cooktop, benches, walls & ceilings. Replacing the damaged part of the kitchen with modern equivalent materials or appliances. A dishwasher could be added even if not previously there (not an improvement as it only ‘betters to a minor extent’) Extending the house to increase the size of the kitchen as well as replacing the damaged areas and appliances
Cyclone/ flood or similar natural disaster damages roof of the property. Replacing the roof. If at the same time as replacing the roof, you add a second storey to the property.
Replace entire home destroyed by fire. Rebuild a comparable home. Rebuilding a house that is not comparable to the original. Although if it is rebuilt from insurance monies rather than borrowings, there is no contravention.


What are examples of ‘Repairs & Maintenance’ on a SMSF Property?:

  • Gutter replacement, including with a modern equivalent and a leaf guard.
  • Repainting of house
  • Fence replace with modern equivalent materials, can include adding a gate to provide another access point.
  • Installing a fire alarm to meet with local council requirements

What are examples of ‘Improvements’ on a SMSF Property?

  • Swimming pool installation
  • Building a pergola
  • Adding a second bathroom
  • Installing a home automation system.
  • Farming property – add additional bores, yards, sheds or fencing.


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