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Do's & Don'ts with Property in an SMSF Under a Limited Recourse Borrowing Arrangement

By H&R Block 7 min read

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, an 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).

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 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 and Maintenance can be financed by borrowings

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

'Repairs & Maintenance' Defined

  • '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'.

'Improvements' Defined

  • 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.


Further examples of Repairs & Maintenance (can be paid for by borrowings):

  • 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

Further examples of Improvements (must be paid for by available money in the SMSF):

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

'Original Asset' vs 'Replacement Asset

Whilst a property is subject to an LRBA, it must not be dealt with in such manner that constitutes the 'replacement' of the original asset for which the arrangement was entered. Here are some examples to further explain this concept. Once the original asset is 'replaced' the LRBA ceases. If borrowings still exist and the LRBA ceases, a breach has occurred.

Original Asset Replacement Asset Why
Vacant block of land on single title Subdivided to become multiple titles One asset has become multiple assets
Vacant block of land on single title Building a house on the land. (changed asset from vacant land to residential premises) Asset has been changed from vacant land to residential premises
Residential house & land House demolished following fire and replaced with 3 strata title units. Character of asset has been changed & three different assets created.
Residential house & land House converted into restaurant and fitted with commercial kitchen. Fundamental change in the asset from residential premises to restaurant premises.


Following are examples of where changes have been made to a property, but aren't considered fundamental enough to in fact replace the original asset. The original LRBA is maintained. However, the funding for these changes must come from already available monies in the SMSF and not from borrowings.


Original Asset

Replacement Asset


Residential house and land

one of the bedrooms is converted into a home office.

Does not affect overall character of the asset as a residential home. Asset is therefore still the same.

Residential house and land

Extension to add two bedrooms / adding a swimming pool / extension to include outdoor entertaining area / new shed and driveway / addition of garden shed

Any or all of these improvements would not constitute a different asset as the asset would remain a residential house.

Residential house & land

Compulsory acquisition of part of front yard by third party for road widening

Asset remains as it was when the LRBA was first entered into as the change to the title is only minor, there is no fundamental change to the asset - it is still a residential property.

Residential house & land

Adding a granny flat in the backyard of a property that already has a residence established on it.

Character of asset remains - residential premise.


'Single Asset' in the context of property

For the purposes of LRBA's, one title equals one asset. However sometimes what appears to be on just one asset actually exists over multiple titles. The tax office has clarified common scenarios to ensure you set up multiple LRBA's if applicable.



Single or Multiple Assets?

Multiple adjacent blocks of land

Blocks of land are on separate titles, no reason they can't be sold separately but vendor will only sell together.

Single LRBA not acceptable. Must have separate LRBA for each title.

Factory complex that physically sits over multiple titles.

Titles can't be sold separately given the fact the factory covers all three titles.

A single LRBA is acceptable

Farmland with multiple titles

A single business but multiple titles that have no legal or physical impediment to selling off title separately.

Single LRAB is not acceptable. Each title must have a separate LRBA.

Completed 'off the plan' apartment

Paid deposit in cash and balance funded by LRBA

One LRBA ok.

Vacant block of land. House built on it after period of time

Vacant block of land is considered one asset, then building on it constitutes another.

More than one asset, need more than one LRBA.

House & Land Package

Considered one asset by tax office

One LRBA is sufficient.

Apartment with separate car park

Technically two titles but can't sell one without another - so considered together as one single asset

A single LRBA is ok.

Serviced Apartment & Furnishings

Where the furnishing package is an additional purchase to the apartment. They are two separate assets.

Multiple LRBA's are required.

Option to purchase a house

The option is an asset. If the house is subsequently purchased, that is a different, additional asset.

Couldn't all be done under one LRBA. Would require multiple.

If you have any questions in relation to the information provided, please do not hesitate to contact a qualified and experienced SMSF Specialist accountant in our team.

Telephone: 1300 6110 320



Important information

This content has been prepared by H&R Block Ltd ("H&R Block"), ABN 89064268 800.The information is general in nature and ds not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, H&R Block, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

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