Yes, you can renovate or upgrade a warehouse held in your SMSF, but the funding source decides what is allowed. If the fund owns the property outright, it can pay for improvements from its own money. If the property sits under a limited recourse borrowing arrangement, borrowed money can only maintain or repair it, never improve it.

It is one of the most common questions we get from business owners who have bought their own premises through super. The warehouse needs a mezzanine, a bigger roller door, a new office fit-out or solar on the roof, the business is happy to pay for it, and everyone assumes the fund can just write the cheque. Sometimes it can. Sometimes doing exactly that quietly breaks the borrowing arrangement and costs the fund far more than the upgrade.

This article walks through the actual rules, in the order you need to apply them, written by Mina Baselyous, a Chartered Tax Advisor (CTA), Certified Practising Accountant (CPA) and Registered Tax Agent based in Melbourne. By the end you will know whether your warehouse can be upgraded, who is allowed to pay for it, and the sequence that keeps the fund compliant.

First question: does the fund still owe money on the warehouse?

Everything turns on whether there is still a limited recourse borrowing arrangement (LRBA) over the property. A fund that owns its warehouse outright has broad freedom to improve it using fund money. A fund still repaying an LRBA is heavily restricted, because the borrowing rules in the Superannuation Industry (Supervision) Act 1993 attach conditions to what the borrowed asset can become.

This is not a niche problem. The ATO’s SMSF quarterly statistical report for the March 2026 quarter, published 16 June 2026, counted 672,805 SMSFs holding an estimated $1.06 trillion in assets, and business premises held through a fund are one of the most popular structures Australian business owners use. A large share of those properties were bought with a loan that is still running.

So before you price a single quote, answer this: is there a loan, and is it an LRBA? If yes, read the LRBA section below before you commit to anything.

Repair, maintenance or improvement: where the ATO draws the line

The ATO splits work into three categories in SMSFR 2012/1, its ruling on limited recourse borrowing arrangements. Maintenance prevents deterioration. A repair remedies damage or defects and restores function without changing the asset’s character. An improvement significantly alters the state or function of the asset for the better. The category decides what money can pay for it.

How the three categories apply to a warehouse

• Maintenance: repainting the exterior, servicing the roller doors, routine gutter and roof work, resealing the hardstand before it cracks.
• Repair: replacing a failed roller door motor, patching a leaking roof, replacing damaged cladding with a modern equivalent, restoring a worn concrete floor.
• Improvement: adding a mezzanine, extending the building, installing a new office fit-out where there was none, adding a solar system, putting in a cool room, resurfacing raw ground into a sealed car park.

Two points catch people out. First, the comparison point is the asset as it was when the fund acquired it, not as it is today (SMSFR 2012/1, paragraphs 16 and 22). The worse the condition on the day of purchase, the more likely later work is treated as an improvement rather than a repair. Paragraph 133 of the ruling is explicit that substantially renovating a run-down building to make it tenantable is an improvement.

Second, you look at the whole asset, not the one part being worked on. Replacing every window in the warehouse is still a repair to the building. Replacing the building is not.

If the fund owns the warehouse outright, you can improve it

Where there is no borrowing, an SMSF can use its own accumulated money to improve a warehouse it owns, including extensions, mezzanines and fit-outs. There is no rule against making fund property better. What there are rules against is how the work is funded, who does it, and what the fund pays for it. Those are the rules that get breached in practice.

The conditions that still apply:

• The fund must pay from fund money. Not the trading company, not the member’s personal account. If a member pays a builder directly, that payment is either a contribution counted against their caps or a breach, and neither is what anyone intended.
• The sole purpose test. The upgrade has to be an investment decision made for members’ retirement benefits, not a favour to the business that leases the shed. In SMSF Regulator’s Bulletin SRB 2020/1, issued 13 March 2020, the ATO makes clear that trustees must be able to show decisions are solely pursuing the fund’s retirement purpose.
• Arm’s length dealing. Every contract, every price, every rate. SRB 2020/1 specifically flags related professionals such as builders who do not charge the fund or charge under market rates.
• Liquidity and the investment strategy. A fund that spends most of its cash on a fit-out and cannot pay a pension or an insurance premium has a different problem. The investment strategy should be updated and minuted before the work starts, not after the auditor asks.
• The lease and the rent. If your business leases the warehouse from the fund, a material upgrade usually means the market rent has moved. Leaving the rent unchanged after the fund spends money improving the premises is exactly the sort of non-commercial arrangement the ATO looks for.

Business real property, which a warehouse used wholly and exclusively in a business will normally be, is also excluded from the in-house asset rules, which is why owning your premises through super works so well in the first place. That exclusion is about the property, though. It does not excuse a related-party building contract priced at mates’ rates.

If the warehouse is under an LRBA, the rules tighten sharply

Under an LRBA, borrowed money may only be used to acquire the asset, to meet expenses connected with the borrowing or acquisition, and to maintain or repair the asset. It can never be used to improve it. Fund money that was not borrowed can pay for improvements, but only while the changes do not turn the property into a fundamentally different asset.

That is the whole rule in two sentences, and each half has teeth.

You cannot borrow to improve, full stop

If borrowed money improves the property while the borrowing continues, the trustee contravenes the borrowing prohibition (SMSFR 2012/1, paragraphs 14 and 15). Redrawing on the loan to build a mezzanine is a contravention. So is a construction facility added to the existing loan. Drawing down further for genuine repairs or maintenance is fine if the loan terms allow it (paragraph 28), which is a distinction worth getting in writing from the lender before you draw.

Fund cash can improve it, until the asset changes character

Accumulated fund money can pay for improvements to a property under an LRBA (paragraph 30). The limit is that alterations must not fundamentally change the character of the asset. If they do, the arrangement stops satisfying the LRBA conditions from that moment, and the fund is left holding a non-complying borrowing (paragraphs 33, 34 and 139).

The ruling’s own examples are useful here. Doubling the number of bays at a car wash was an improvement, but the property remained a car wash, so it was not a different asset (Example 15). A fund-financed shed built on a cattle property was an improvement and not a different asset (Example 13). Building a residence on a hobby farm, or converting residential premises into a restaurant, did change the character (Example 14 and Table 2).

Applied to a warehouse, extending the floor area, adding a mezzanine or fitting out an office within the existing shell will usually leave you with the same industrial property, improved. Subdividing the title, demolishing and rebuilding something else, or converting the site into strata units is where you cross the line. In our experience the conversion cases are the dangerous ones, because they are exactly the projects owners get excited about.

Where a major change is the plan, the cleanest path is usually to pay the loan out first, then improve the property free of the LRBA restrictions. That is a cash flow and timing conversation, and it belongs in your tax planning cycle well before the builder is booked.

The trap that catches tradies: doing the work yourself

If you are a licensed builder, electrician or plumber and you improve your own fund’s warehouse without charging it a commercial rate, the fund’s rental income and the eventual capital gain on that property can be taxed as non-arm’s length income at 45 per cent. This is the single most expensive mistake we see, and it is usually made with the best of intentions.

The ATO’s position is set out in LCR 2021/2, which is legally binding and applies to income derived from the 2018-19 income year onwards. The ruling draws a line between work you do in your capacity as trustee, which does not trigger the rules, and work you do in your individual or business capacity. The factors it weighs include whether you charged the fund, whether you used your business equipment, whether the work required a licence, and whether it was covered by your business insurance.

Example 9 of the ruling makes it concrete. A plumber trustee who fixed a minor leak with her own tools was acting as trustee. The same plumber who carried out a full bathroom and kitchen renovation, scheduled it into her business calendar, used her trade tools and an apprentice, and did not charge the fund, was acting in her individual capacity. The rental income and the later capital gain were non-arm’s length income. Example 10 shows the fix: the electrician who did the work and charged the fund a commercial rate was fine.

The amendments in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, which received royal assent on 28 June 2024, softened the position for general fund expenses by capping the amount treated as non-arm’s length income at twice the shortfall. That cap does not apply to expenses tied to a particular asset. Building work on your warehouse is tied to that warehouse, so the full income from the property remains exposed.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is a client doing the fit-out at cost because it feels like they are being generous to their own super. They are not. They are handing the ATO a reason to tax the rent and the eventual sale at the top rate, and a discount that saved forty thousand dollars in build cost can cost many multiples of that on exit.

If you want to do the work, do it properly: quote it, invoice it at a commercial rate, have the fund pay it, and keep the evidence of how the rate was set.

How to actually do it, in the right order

Run the upgrade as a sequence, not as a set of simultaneous decisions. Establish the loan position, classify the work, confirm the funding source, document the trustee decision, contract at arm’s length, then reset the lease and the valuation. Doing these in order is what keeps the audit clean and the tax outcome intact.

1. Confirm the loan position. Is there an LRBA, what is the balance, and can it realistically be paid out before the work starts?
2. Classify every line of the scope. Split the quote into maintenance, repairs and improvements. Mixed scopes are normal and the split needs to be defensible.
3. Match each line to a funding source. Borrowed money to maintenance and repairs only. Fund cash to improvements.
4. Test the different asset question. If the property would come out of the project as something other than the warehouse the fund bought, stop and restructure.
5. Check the fund has the cash. Including contributions, rent and existing commitments, with a buffer. Update the investment strategy and minute the decision before committing.
6. Contract at arm’s length. Written contracts, market pricing, invoices in the fund’s name, payments from the fund’s bank account. No exceptions for related builders.
7. Deal with GST. A fund registered for GST because of commercial rent will generally claim credits on the construction costs. Our guide to GST on commercial property covers the mechanics.
8. Reset the lease and the market valuation. New rent on commercial terms, new valuation for the financial statements, both documented.
9. Brief your auditor early. An auditor who sees the plan in advance is a far cheaper conversation than one who finds it afterwards.

What it costs when it goes wrong

The consequences are not a please explain letter. Breaching the borrowing rules is a reportable contravention that your auditor must lodge. Non-arm’s length income is taxed at 45 per cent and can attach to the property’s rent and its eventual capital gain. In the worst case the fund can be made non-complying, which costs roughly half of it.

There is also a newer consideration for larger funds. The Better Targeted Superannuation Concessions measure, which the ATO confirms is now law and applies from 1 July 2026, introduces an additional tax on earnings for members with a total super balance above the large super balance threshold of $3 million for 2026-27, with a second threshold at $10 million. A substantial warehouse upgrade lifts the value of the fund. For members near those thresholds, that belongs in the modelling before the project is approved, not after.

How we approach a warehouse upgrade at Pinnacle Accounting & Advisory

We treat a fund property upgrade as a structuring decision, not a bookkeeping one. That means looking at the loan, the lease, the member balances, the business cash flow and the exit plan together, then setting the funding and contracting approach before any money moves. The compliance follows from the structure, not the other way around.

For clients using our Virtual CFO service, this is usually a modelled decision: what the upgrade does to fund liquidity, what the new commercial rent does to the trading business, and whether paying out the LRBA early is the better use of capital. For clients who want help with the surrounding property and entity picture, our articles on buying residential property in your SMSF and tax planning for property investors cover the adjacent decisions.

If you own your premises through super and you are planning works, the time to get advice is while the quotes are still quotes. As a small business accountant in Melbourne, that is the conversation we would rather have twelve weeks early than twelve months late.

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