Chalmers clarifies LRBA capital improvement rules for SMSFs

The Government has clarified that accumulated funds held by self-managed superannuation funds (SMSFs) can be used to finance capital improvements to assets acquired under a limited recourse borrowing arrangement.

The clarification was provided to the Parliament by the Treasurer, Jim Chalmers in response to a petition.

However, in doing so, Chalmers also reinforced the existing interpretation that money borrowed by a SMSF under a limited recourse borrowing arrangement for the acquisition of an asset cannot be used to improve the value of the asset and specifically noted the status of energy efficiency.

“As energy efficiency capital improvements are an improvement to the value of a rental property, this is not allowable under a limited recourse borrowing arrangement,” his statement said. “Borrowing within a superannuation fund inherently adds risk to the safety of retirement savings.”

“Since superannuation receives substantial tax concessions designed to encourage people to save for retirement, it is important that there are safeguards in place to ensure that superannuation is preserved for its intended purpose of supporting income in retirement. Therefore, limited recourse borrowing arrangements applied for the acquisition of an asset cannot be used to improve the asset, as this could fundamentally change the nature of the asset used as security by the lender, potentially increasing the risk to the fund.”

“However, accumulated funds held by a self-managed superannuation fund can be used to finance capital improvements to assets acquired under a limited recourse borrowing arrangement, including energy efficiency improvements to rental properties,” his statement said.

“This is provided that the improvements do not fundamentally change the nature of the asset. The Government considers that the current settings strike the right balance between allowing trustee(s) to maximise the returns in the superannuation funds and preserving superannuation for its purpose of providing retirement income.”