couple sitting on floor during house renovation

SMSF Property and Renovations

Can I renovate my SMSF property?

An exciting part of owning property is able to renovate it, but doing so becomes a little more complex inside your Self Managed Super Fund (SMSF).

If your fund owns a property outright, meaning your fund has not borrowed to buy the property, you can renovate or improve the property to your heart's content. However, if your fund has borrowed to buy the property, and the loan is still in place, you can only make improvements or renovations which do not change the character of the property.

Super rules state that if you want to renovate a property inside an SMSF using borrowed funds, then you have to be careful that you do not improve the property. For example, a residential house that is converted into a restaurant, or a vacant block of land that is subdivided, resulting in multiple titles, would be considered changing the character of the property.

It is also important to note that if the renovations or improvements are not financed by the SMSF, but rather by the members themselves, then the value of the improvement or renovation will need to be recorded as a contribution made to the fund and will count against contribution caps.

It's important to understand the distinction between three concepts of property alteration – maintaining, repairing and improving.

Can you renovate an older property?

If you want to renovate an older property with borrowed funds, you have to be careful that you do not "improve" the property.

But let's assume that you're actively trying to add value to your property, so how do you do this? You'll need to look at some other options.

You can go nuts with renovating and growing the value of your property if you can do so without using borrowed funds, i.e. you fund the reno through surplus cash you have in your SMSF account. This can be a fantastic strategy to not only grow the capital value of your asset, but also allow you to charge a higher rent on the property, and therefore increase cash inflows to your fund.

Remember if you take this approach, and you're going to have a period without tenants, don't use all your cash on the renovations! Make sure you keep at least 10% of the fund in cash to keep the bank happy, and you've got enough on top of that to fund the mortgage payments whilst you're not charging rental income.

What if I don't have surplus cash to do renovations?

Knowing your cash position in the fund is absolutely key before purchasing any property. Having this available, or not, might dramatically affect the property you purchase in the first place.

If you don't have the money right now, there might be some other works you can do to keep your property looking fresh (keep reading!), or as an alternative, you wait a few months to accumulate the resources you need to pay for the renovations (or make extra contributions to your super to top it up).

Why would I renovate if not to improve the value of the property?

It's important to understand the distinction between three concepts of property alteration – maintaining, repairing and improving.


This is about preventing damage or deterioration of your property so that it can continue to exist in its current state. Painting your house or replacing the guttering, for example.


This is about making good any defects or damage to your property to reinstate it to its current state. It may be appropriate to consider borrowed funds for a significant repair, such as substantial structural or electrical issues, or damage from a natural disaster. Repairs might include restoring part of a kitchen or bathroom affected by fire or flood or even rebuilding the entire house is affected by fire, provided you build a comparable house.


This is about making your property significantly better than it was before, this could be through adding additional features, improving the quality of existing features like renovating the bathroom, adding an extension or changing the rights to the property.

Renovations can be a great way to grow the capital of your super fund's investment, but if you take this approach, you may have a period without tenants and rental income. Just make sure you keep within the rules and if you have lending in place, make sure you keep 10 per cent of the fund's value in cash or other liquid assets to keep your lender happy.

Borrowing for repairs vs renovations/ improvements

Self-Managed Superannuation Fund is allowed to borrow money to repair acquirable assets but is prohibited from borrowing money to improve acquirable assets. Hence, trustees must understand the differences are between 'repairing' an asset and 'improving' an asset before inadvertently incurring expenses that result in a breach of super legislation.

Repairs are generally required due to the deterioration of an asset due to ordinary wear and tear or damage that occurs over time. A repair restores the asset to its original condition and includes the replacement of a part of an asset that restores its functionality.

In contract, improvements are more substantial in nature, and the state of the asset has changed for the better – normally resulting in an increase in the value of the asset. However, alterations or additions that provide a minor enhancement in the state or function of the asset will not be considered an improvement.

When can an SMSF renovate/improve its property?

As mentioned above, an SMSF is specifically prohibited from borrowing to fund a renovation or improvement of its property. However, the SMSF can use money from other sources (including its own money) to fund improvements to an asset that is subject to a Limited Recourse Borrowing Arrangement (LRBA).

Whilst an SMSF can use its own money to fund improvements, and those renovations mustn't result in an asset that was acquired under an LRBA to become a different asset or to have fundamentally changed.

Whether renovations to a property will result in the asset becoming a different asset will be determined by the facts of the individual situation. Relevant factors would include:

(a) whether another asset has entirely replaced the asset;

(b) whether the function of the asset has significantly changed through the improvement; and

(c) whether there is still a single acquirable asset.

For example, a residential property purchased under an LBRA that has been renovated to change the front part of the house into a hairdressing studio would be significant enough for the asset to have fundamentally changed and become a replacement asset. This would result in a breach of super legislation.

In contrast, works to renovate a bathroom in a residential property purchased under an LBRA would not be sufficient enough for the asset to be considered fundamentally changed or a replacement asset. This would not result in a breach of super legislation.

Would the alterations change the character of the property?

Under the borrowing rules, an SMSF is prohibited from borrowing to improve a property.

However, improvements can be made using the SMSFs own funds, as long as it does not alter the character of the property to the extent that the property becomes a different asset. This is supported in the ATO's publication Self Managed Superannuation Fund Ruling (SMSFR) 2012/1.

In our example, the property acquired by the SMSF was originally a residential property and was zoned 'residential'. Despite the change in zoning to 'mixed-use', the character of the property would still be considered to be residential.

Therefore, the proposed alterations would change the character of the property from a residential dwelling to a commercial property.

However, if the lease agreement between the related party tenant and the SMSF trustee contains 'retention of ownership' and 'make good' clauses, the alterations would not change the character of the property.

These clauses require that at the end of the tenancy, the tenant must remove all added fixtures, so the property is left in the same state as it was on entry.

As the alterations remain with the tenant, the property would not become a different asset being held in trust under the borrowing provisions.

As a Self-Managed Superannuation Fund trustee, it's difficult to know and understand all the rules around investing with your fund. The area of property investment can be very complex, and many trustees are left wondering if they can renovate their property which is owned by their super?

Much self-managed superannuation fund (SMSF) trustees like and understand the bricks and mortar investment that is property; more than the intangible financial instruments such as shares and bonds. Property investment has increased in SMSFs since the superannuation law permitted SMSFs to borrow and a downturn in the official interest rates, decreasing the return on cash-based investments; term deposits.

However, superannuation rules in regards to purchasing and owning a property are complex, and care needs to be taken when considering normal activities for a property investor such as renovating especially with there is an outstanding loan.

older lady with gloves on cleaning and renovating room

Why renovate?

Renovating through an SMSF is only worthwhile if it significantly improves the return on your property and if it is allowable under the relevant legislation.

Outright or Borrowing

The ability to renovate a property that you own through an SMSF comes down to how you purchased it.

For SMSF's that borrowed to buy the property, they are restricted in what they can do.

However if the SMSF purchased the property outright, then as the trustees of the SMSF you have full discretion to do whatever you want; renovate, sub-divide, develop, provided it is permitted under your SMSF deed.

Properties purchased with borrowings

If the SMSF's property was purchased using borrowed money and the borrowing remains outstanding, then you are restricted around renovating or improving the asset.

  • The improvement is funded by cash already within the SMSF, therefore not with borrowed money.
  • The property is so fundamentally changed that it creates a 'replacement asset'.

Repair vs. Improvement

As discussed above, SMSFs are not allowed to finance improvements with borrowed monies. However, they can use borrowed monies for repairs.

A repair is a work to restore the property without changing its character. It repairs, replaces or corrects something that is already there that has become worn out or broken through ordinary wear and tear, accidentally damaged, or by natural disasters.

Improvement is a work that provides a greater function to the property and usually involves increasing the value of the property via the addition of additional features.

What renovations create a replacement asset?

Two main types of renovation/improvement results in a breach in the replacement asset clause:

  • The property is physically altered in such a way that is has a different function or purpose. Example: Converting a residential property into a real estate agent's office would be a replacement asset whereas adding a pool or additional bedrooms would not result in a replacement asset as it is still a residential home
  • The legal rights associated with the property are altered. Example: Any changes to the title of a property, such as sub-division or creating strata titles result in a replacement asset

Can I renovate myself?

If you are not licensed and qualified to do the work required, and you don't provide these services to the general public through your business – you cannot renovate the property yourself.

If you are in the building and renovation industry – your SMSF can hire you or your company to perform the renovation at a market rate. It's also worth noting the SMSF must purchase all materials and supplies directly; not from you or your business as this would be acquiring assets from a related party.

If you're thinking of giving your home a total makeover using your SMSF, think again. Unfortunately, while you and your fellow trustees have some control over your fund, it doesn't mean you can spend your money however you like.

The ability to renovate a residential property that you own through an SMSF comes down to how you purchased it. Those who borrowed through their fund to buy the property are restricted in what they can do. Slight improvements and repairs can be made, but a full-blown renovation is saved for those who used the cash in their fund to buy the property.

If a property is purchased outright using the cash in your fund, then you are entitled to do whatever you like to the property, provided your deed allows you to do so. This may also include subdivision or development.

Those who borrowed through their fund aren't entirely prohibited on making improvements on their property. Repairs are allowed, but they can't be significant alterations that change the inherent character of the property. If you want to make renovations to your property, the best way to do this would be by borrowing outside of your super fund.

Whether you're renovating to repair with borrowed funds or doing a complete makeover with accessible cash, renovating through an SMSF is only worthwhile if it improves the return on your property exponentially. Not playing by the rules or accessing your SMSF prior to retirement for personal gain can result in hefty penalties with fines up to 40 per cent of the fund value.

man holding drill to wooden floor


SMSF members mustn't try and draw up lease agreements themselves or perform any work on their SMSF's properties themselves. This is particularly important where SMSF commercial properties are being leased to related parties, and the SMSF has taken out a loan to purchase the property.

I would recommend employing a professional to draw up lease agreements were things, such as 'retention of ownership' and 'make good' clauses are stated clearly in the lease agreement.

It is also best to employ arm's length builders and tradespeople to perform alterations work on SMSF properties.

I would also advise SMSF trustees to seek approval from the ATO prior to selling a property owned by their SMSF, which has borrowed to purchase the property, where related-party tenants made the alterations, and the property is not returned to its original character prior to the sale.

Property can be a great investment for SMSFs. However, care must be taken not to change the character of the property permanently, or to make alterations that could be viewed by the ATO as a contribution or an acquisition.

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