Top Strategies to Avoid SMSF Property Improvement Traps

SMSF Loans Cannot Fund Property Improvements

Borrowed money under a Limited Recourse Borrowing Arrangement cannot be used to improve an existing asset. The law requires that the borrowed funds acquire a single asset or collection of identical assets, plus related acquisition costs like stamp duty and loan establishment fees. Once settlement occurs, no further drawdowns are permitted for renovations, extensions, or capital works of any kind.

Consider a paramedic with SA Ambulance Service who uses their SMSF to acquire a commercial property in Torrensville under an LRBA. The property settles for $480,000 with a 30% deposit funded from accumulated super contributions. Six months after settlement, the tenant requests a warehouse extension to expand their operations and offers to sign a longer lease at a higher rental rate. The fund cannot borrow additional money to construct the extension. The only way to proceed is to use existing fund assets, meaning the trustee would need to either accumulate rental income over time or make further contributions to the fund within the annual caps, then pay for the works from those accumulated assets.

The restriction exists because the asset held in the bare trust must remain the same asset that was originally acquired. Improving or altering the asset fundamentally changes what is held in trust. This creates a practical tension for ambulance workers who understand that property returns often depend on value-add strategies. The LRBA structure prevents leveraging borrowed money for those strategies.

Commercial Property Under an LRBA Remains Viable After the 2026 Residential Ban

New LRBAs for commercial property that meet the business real property definition remain compliant after the August 2026 legislative changes. Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be operated by the fund itself. A warehouse leased to a logistics company, a medical consulting suite leased to a GP practice, or a retail premises leased to a pharmacy all qualify if the property is used exclusively for business purposes.

The residential LRBA ban does not affect existing arrangements entered into before approximately 10 August 2026, provided the contract was exchanged before that date. Paramedics with grandfathered residential LRBAs can refinance and maintain those arrangements without triggering the prohibition. Commercial LRBAs were never restricted and continue to operate under the original rules.

The distinction between acquisition costs and improvement costs determines whether a drawdown is permitted. Acquisition costs are directly tied to the purchase transaction itself. Stamp duty, conveyancing fees, loan establishment costs, and building and pest inspection fees all fall within the scope of permitted borrowing. By contrast, any expenditure that enhances, alters, or extends the asset after settlement is classified as an improvement and cannot be funded through the LRBA.

Repairs and maintenance present a grey area. The ATO has historically distinguished between repairs that restore an asset to its original condition and improvements that enhance or extend its functionality. Replacing a broken air conditioning unit with an equivalent model is a repair. Installing a new split system where none previously existed is an improvement. Repainting a faded exterior is maintenance. Repainting and re-cladding to modernise the appearance is an improvement. The line is not always clear, and the risk of non-compliance sits with the trustee.

For paramedics funding commercial property through an SMSF loan, the practical consequence is that any capital works must be funded from contributions or retained earnings. A fund holding a commercial premises in North Adelaide might receive $45,000 in annual rental income. After expenses and the 15% tax on fund earnings, roughly $35,000 remains. If a tenant requests a fitout upgrade costing $60,000, the fund would need to accumulate income over two years or rely on member contributions within the $32,500 annual concessional cap. This limits the speed at which the fund can respond to tenant demands or market opportunities.

Refinancing an Existing LRBA Without Creating a New Arrangement

Refinancing an existing LRBA does not automatically trigger a new arrangement, but significant changes to the terms or structure may end the original arrangement and start a new one. The ATO has not yet updated its guidance following the 2026 residential ban, but the existing position under Practical Compliance Guideline PCG 2016/5 remains current.

Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original terms, borrowing to acquire a different asset, or changing the ultimate beneficiaries. A paramedic refinancing a grandfathered residential LRBA to obtain a lower rate with a different lender is generally permitted, provided the loan continues to relate to the same property held in the same bare trust structure with the same limited recourse character. Adding a line of credit or offset account linked to other fund assets, or refinancing to a higher amount that funds a property improvement, would likely constitute a new arrangement and may not qualify for grandfathering.

Commercial LRBAs can be refinanced without restriction, subject to the same compliance conditions. The refinanced loan must relate to the same single asset, maintain limited recourse to that asset only, and meet arm's length terms consistent with the ATO's published safe harbour rates. For ambulance workers holding commercial property in areas like Unley or Prospect, refinancing may allow access to lower rates or better loan structures, but the borrowed amount cannot exceed the outstanding balance plus costs directly related to the refinancing itself.

How Division 296 Tax Affects LRBA Strategy for Paramedics with High Balances

From 1 July 2026, members with a total superannuation balance exceeding $3 million at year-end pay an additional 15% tax on earnings attributable to the amount above that threshold. Members exceeding $10 million pay an additional 10% on earnings above that higher threshold. Outstanding LRBA amounts entered into on or after 1 July 2018 are included in the member's total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction.

For a paramedic with SA Ambulance Service who has accumulated $2.6 million in super and enters into a commercial LRBA with a related party lender, the outstanding loan balance may be counted in the total superannuation balance calculation. If the loan balance is $400,000, the total superannuation balance may exceed $3 million, triggering Division 296 tax on a portion of the fund's earnings. The tax applies regardless of whether the earnings are distributed, meaning it can affect cash flow in funds heavily weighted toward property with limited liquidity.

The interaction between Division 296 tax and LRBA debt inclusion creates a disincentive for high-balance members to use related party lending. Where the LRBA is with an arm's length lender and the member has not yet satisfied a condition of release, the outstanding debt is not included in the total superannuation balance. This distinction may influence the choice of lender and loan structure for paramedics approaching the large super balance threshold.

Using Existing Fund Assets to Fund Capital Works After Settlement

Once an LRBA settles, the only way to fund improvements is through existing fund assets. Those assets come from three sources: contributions within the annual caps, rental income retained within the fund, and earnings from other fund investments. For paramedics contributing at the concessional cap of $32,500 per year, the after-tax contribution to the fund is $27,625. If the fund holds a commercial property generating $50,000 in net rental income annually, taxed at 15%, the fund retains $42,500. Combined, the fund accumulates roughly $70,000 per year that could be directed toward capital works.

A paramedic planning to undertake a significant fitout or renovation within their SMSF-held commercial property should model the accumulation timeline before committing to the acquisition. If the property requires $100,000 in upgrades to attract a higher-quality tenant, and the fund can accumulate $70,000 per year, the works are at least 18 months away from being feasible. That delay may affect the property's rental appeal and the fund's overall return.

Alternatively, the paramedic could make a one-off non-concessional contribution of up to $130,000, or trigger the bring-forward rule to contribute up to $390,000 over three years, provided their total superannuation balance on 30 June of the previous year was below $1.84 million. This accelerates the availability of funds for capital works but uses contribution cap space that could otherwise have been preserved for future years. The decision depends on the member's age, income, and long-term super strategy.

Call one of our team or book an appointment at a time that works for you. We work with paramedics and ambulance workers across South Australia who are using super to build wealth outside the shift roster, and we understand how LRBA restrictions affect your property decisions. Whether you are looking at investment loans for paramedics outside super, refinancing an existing SMSF arrangement, or planning your next commercial acquisition, we will walk you through what is permitted, what is not, and how to structure your funding to stay compliant while building the portfolio you are working toward.

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