SMSF Property and Renovations

Can I renovate my SMSF property?

The ability to make improvements to your home is one of the most exciting aspects of being a property owner; however, if you have a self-managed super fund, this process can become somewhat more complicated (SMSF).

If your fund owns a property outright, which means that it did not take out any loans to purchase the property, you have complete creative freedom when it comes to renovating or improving the property. If, on the other hand, your fund used a loan to purchase the property and the loan is still active, the only kind of modifications or repairs that are allowed is those that do not alter the nature of the property.

According to the super laws, if you wish to renovate a home that is held within an SMSF using borrowed funds, then you need to be careful not to improve the property in any way. It would be deemed a change in the character of the property, for instance, if a residential house were to be transformed into a restaurant or if an undeveloped piece of land were to be partitioned, leading to the creation of numerous titles.

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If the improvements or renovations 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 it will count against contribution caps. It is also important to note that if the SMSF does not finance the improvements or renovations, then the members must do so.

It is essential to clearly understand the differences between three types of property improvement: maintenance, repairing, and improving.

Are you able to renovate a property that is older?

If you wish to renovate an older property using funds you borrowed, you need to be careful that you do not "improve" the property in any way.

But let's say that you are actively seeking to add value to your home. If this is the case, the next question is how you may accomplish this goal. You'll need to consider the availability of some additional choices.

If you can make the necessary improvements to your home and increase its worth without taking out a loan to do so, i.e., if you pay for the renovations with extra cash that you have in your self-managed super fund (SMSF), account, you have a lot more leeway. 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 increase the amount of cash flowing into your fund. In addition to growing the capital value of your asset, this can also allow you to charge a higher rent on the property.

If you decide to go with this strategy, make sure you don't spend all of your money on the renovations because there will be a period of time when you won't have any tenants. A cash reserve of at least 10 percent of the total amount should be maintained to establish a healthy relationship with the bank. In addition, you should ensure that you have sufficient funds to cover the cost of the mortgage payments even if you are not collecting rent from the property.

What if I don't have any extra money to go toward the renovations?

Before making any property purchases, you must have a solid understanding of your cash situation within the fund. It is possible that having access to information or not having access to it, will significantly impact the property you initially acquire.

If you don't have the money right now, there may be other things you can do to keep your property looking good (keep reading! ), or you can wait a few months to save up for the upgrades (or make extra contributions to your super to top it up).

If it wasn't to increase the value of the home, why would I bother renovating it?

It is essential to have a clear understanding of the differences between three different types of property improvement: maintenance, repairing, and improving.


The purpose of this is to protect your property from being damaged or worn down in any way, so that it can remain in the same condition in which it is currently found. For example, you may paint the exterior of your home or replace the guttering.


In order to return your property to its previous condition, it is necessary to repair any flaws or damage that it may have sustained. If the damage is extensive, either structurally or electrically, or if it was caused by a natural disaster, it is possible that it would be prudent to consider borrowing money to pay for the necessary repairs. Repairs may involve reconstructing part of a kitchen or bathroom that was damaged by fire or flood, or you may even have to rebuild the entire house if it was damaged by fire, provided that you create a house that is comparable to the one that was destroyed.


This refers to making significant improvements to your property so that it is significantly more desirable than it was before. These improvements could involve the addition of new features, an improvement in the quality of an existing feature (such as a bathroom renovation), the addition of an extension, or a change in the rights associated with the property.

If you choose this strategy, you run the risk of going through a period in which you do not have tenants and are therefore not receiving rental revenue from the property. However, renovations can be an excellent way to increase the investment's total capital. Just make sure that you don't break any of the restrictions, and if you already have a lending arrangement in place, make sure that you keep 10% of the value of the fund in cash or other liquid assets so that your lender will be happy.

Borrowing for repairs vs renovations/ improvements

It is permissible for a Self-Managed Superannuation Fund to take out a loan in order to make acquirable asset repairs, but such a fund is not permitted to take out a loan in order to make acquirable asset improvements. Therefore, in order to avoid unintentionally incurring costs that result in a violation of super law, trustees need to have a solid understanding of the distinctions that exist between "repairing" an asset and "enhancing" an asset.

In most cases, repairs are necessary because an asset has deteriorated as a result of the normal wear and tear or damage that has occurred over the course of time. The asset is returned to the condition it was in when the repair was performed, which may involve the replacement of a component of the asset that is responsible for restoring its functionality.

The type of improvements made under contract is more substantial, and the asset's status has improved for the better; this typically results in an increase in the asset's worth. On the other hand, adjustments or additions that only slightly improve the asset's condition or functionality will not be regarded as improvements even if they are made.

When is an SMSF permitted to renovate or upgrade its property?

As was just described, it is strictly unlawful for a self-managed superannuation fund (SMSF) to obtain loans in order to finance the renovation or improvement of any of its real estate holdings. A Self-Managed Superannuation Fund (SMSF) has the option of borrowing money from other sources, including its own money, in order to finance the renovation of an asset that is the subject of a Limited Recourse Borrowing Arrangement. If the fund so chooses, it may also use the money it has on hand (LRBA).

Even though an SMSF is allowed to use its own funds for funding upgrades, the asset that was acquired through an LRBA cannot be transformed into a new asset or have significant changes made to it as a result of the renovations.

Whether or if the enhancements made to a piece of property will result in the asset's metamorphosis into a different kind of asset is something that will be determined by the particulars of each individual situation. The following are some instances of factors that are relevant:

  • (A) if the asset has completely been replaced by another asset;
  • (b) whether the enhancement materially impacted how the asset performed;
  • (c) whether or not there is a single asset that can still be acquired.

For example, if a residential property was purchased with the help of an LBRA, and then that property was renovated so that the front part of the house was converted into a hairdressing studio, this would be considered a significant enough change for the asset to be considered to have undergone a fundamental transformation, and it would qualify as a replacement asset. If something like this were to take place, it would be considered a breach of a super law.

On the other hand, the completion of repairs to a bathroom in a residential house that was acquired via the use of an LBRA would not be sufficient enough for the asset to be recognised as having undergone fundamental change or as being a replacement asset. This is because an LBRA is considered to be a long-term financial relationship. This would in no way be considered a breach of the supreme law by any stretch of the imagination.

Would the modifications alter the property's personality?

It is against the regulations governing borrowing for an SMSF to take out a loan for the purpose of making improvements to a property.

However, if the SMSF uses its own money, it is allowed to make improvements to the property so long as those improvements do not fundamentally alter the nature of the asset to the point that it is no longer deemed to be the same asset. If this is the case, the SMSF cannot make the improvements. The Self-Managed Superannuation Fund Ruling (SMSFR) 2012/1 that was published by the ATO provides further evidence supporting this point.

In our example, the land in question was formerly zoned for residential use, and the SMSF ultimately decided to buy it because of this history. Even if the property's zoning was changed to reflect a "mixed-use" designation, it is still considered to have the personality of a residential home. This is the case despite the fact that the designation was reflected in the property's zoning.

As a consequence of these proposed improvements, the property, which is currently utilised for residential purposes, will be converted into one that is utilised for commercial reasons instead.

If the lease agreement between the related party tenant and the trustee of the SMSF includes provisions headed "retention of ownership" and "make good," then the character of the property would not be changed in any way.

These clauses stipulate that at the end of the tenancy, the tenant is responsible for removing any and all newly fitted fixtures, bringing the property back to its original state and ensuring that the landlord receives their full security deposit.

The borrowing rules will not require the property to be classed as a separate asset so long as the tenant continues to retain ownership of any improvements made to the property.

As a trustee of a Self-Managed Superannuation Fund, it can be difficult to keep track of and understand all of the legislation that are relevant to investing with your fund because these regulations are always being updated. Many trustees are left wondering whether or not they are permitted to make renovations to a property that is owned by their retirement fund because the field of real estate investment may be fairly confusing.

Many trustees of self-managed superannuation funds (SMSF) are more comfortable with and knowledgeable about the bricks-and-mortar investment known as property, as opposed to the more abstract financial instruments like shares and bonds. Since the superannuation law allows SMSFs to borrow money and there has been a decline in official interest rates, the return on cash-based investments such as term deposits has decreased, leading to a rise in the number of SMSFs investing in real estate.

However, the restrictions pertaining to purchasing and owning a property under superannuation are complicated, and extreme caution is required when considering common activities for a property investor, such as upgrading, particularly when there is an existing loan.

older lady with gloves on cleaning and renovating room

Why renovate?

Investing in home improvements through a self-managed super fund (SMSF) is only worthwhile if doing so would result in a material increase in the return you receive from your investment property and if doing so is permitted by the applicable regulations.

Outright or Borrowing

The manner in which the property was acquired determines whether or not it can be renovated when it is owned through an SMSF.

There are limitations placed on SMSFs because they were required to take out loans in order to purchase the property.

If, on the other hand, the SMSF buys the property outright, the trustees of the SMSF have complete freedom to do whatever they choose with the property, including renovating, subdividing, or developing it, provided that the SMSF deed authorizes the activity.

Properties that were purchased using borrowed money

If the property that is owned by the SMSF was bought with borrowed money and the debt on the borrowing is still outstanding, then you are limited in the ways in which you can improve or renovate the asset.

  • The enhancement is not funded with borrowed money because the cash that was already within the SMSF was used to pay for it.
  • Because of the extensive renovations made to the property is now considered a "replacement asset."

Repair vs. Improvement

As was just said, SMSFs are not permitted to use borrowed money to finance upgrades to their properties. However, they can pay for the repairs using the money that they have borrowed.

A a repair is work done to restore the property without altering the nature of the property in any way. It restores, replaces, or fixes something that has gotten worn out or broken as a result of normal wear and tear unintentional damage, or natural calamities. This can include things like appliances, furniture, and other structures.

A property can be said to have been improved if the work done on it results in a higher functionality and, in most cases, also results in an increase in its value as a result of the inclusion of extra features.

What renovations create a replacement asset?

There are two primary categories of remodelling or upgrade that lead to a violation of the replacement asset clause:

  • The structure of the home has been modified in such a way that it now serves a different purpose or function after the renovation. For example, converting a residential property into an office for a real estate agent would be considered a replacement asset, however, adding a swimming pool or more bedrooms would not result in a replacement asset because the property would still be considered a residential residence;
  • Changes are made to the legal rights that are associated with the property. For instance, when the title of a piece of property is altered in any way, such as when strata titles are created or when it is subdivided, a replacement asset is produced.

Can I do the renovation by myself?

It is impossible for you to renovate the property on your own if you do not possess the necessary licenses and qualifications to carry out the essential work, and if your company does not offer these services to the general public in any capacity.

If you work in the construction or renovation business, your self-managed super fund (SMSF) may contact you or your company to carry out renovations at the going rate for such work. It is also important to note that the SMSF is required to make direct purchases of all materials and supplies. This means that the SMSF cannot acquire assets from you or your company since this would constitute the purchase of assets from a related party.

Don't use your self-managed super fund (SMSF) to completely redecorate your house if you're considering doing so. Regrettably, despite the fact that you and your fellow trustees have some kind of authority over your fund, this does not mean that you are free to spend your money any way you see fit.

How you bought the residential property that you own through an SMSF will determine whether or not you are allowed to make improvements to it. Those who have borrowed their money in order to purchase the home have fewer options available to them than others have. Modest enhancements and repairs may be carried out, but the full-scale makeover is reserved for the individuals who have already utilized the money in their fund to purchase the home.

If you use the cash in your fund to acquire a piece of the real estate outright, at that point, you have the legal right to do anything you want to the property, provided that the deed gives you permission to do so. This could also refer to the process of subdivision or development.

Those who have taken out loans through their fund are not completely barred from making enhancements to their homes even after they have paid back their loans. It is acceptable to make repairs, but the adjustments that are made to the property cannot be major or they would be considered a violation of the lease. If you wish to make improvements to your home, the most efficient method to do so would be to take out a loan from a financial institution that is not your retirement savings plan.

Renovating through an SMSF is only worthwhile if it increases the return on your home in an exponential manner. This is true regardless of whether you are renovating to repair with borrowed funds or performing a total makeover with cash that is readily available. It is possible to incur substantial penalties, with fines reaching up to forty percent of the value of the SMSF, if you do not play by the rules or if you access your SMSF before to retirement for personal gain.

man holding drill to wooden floor

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing


Members of SMSFs must not attempt to draft their own lease agreements or do any work on the properties owned by their SMSFs on their own. This is of utmost significance in situations in which the SMSF has taken out a loan to purchase commercial assets, and those properties are subsequently leased to parties with which the SMSF has a relationship.

I would advise hiring a professional to draft lease agreements in order to ensure that important provisions, such as "retention of ownership" and "make good" clauses, are articulated in the document in a clear and understandable manner.

When performing modifications work on SMSF homes, it is also ideal to engage builders and craftsmen who are not connected to the SMSF in any way.

In addition, I would recommend to trustees of SMSFs that before selling a property owned by their SMSF, which has borrowed to purchase the property, related-party tenants have made the alterations, and the property is not returned to its original character prior to the sale, SMSF trustees seek approval from the ATO. This is something I would recommend.

The purchase of real estate can be an excellent investment for SMSFs. On the other hand, care needs to be taken not to modify the nature of the property in a way that is irreversible, nor should any changes be made that the ATO would consider to be a contribution or an acquisition.

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