Treasury has confirmed it will not change the rules governing limited recourse borrowing arrangements (LRBA) within SMSFs to allow for capital improvements on rental properties in a response to a petition submitted nearly two years ago requesting the amendments.
Petition EN4442, submitted by an individual citizen on 12 October 2022 with 12 others also signing it, called for changes to superannuation laws to enable SMSF trustees to finance energy-efficient upgrades, such as solar panels, on rental properties through an LRBA.
The petition argued these improvements would help meet government carbon reduction targets and reduce electricity costs for tenants.
In his official response to the petition, dated 19 August, Treasurer Jim Chalmers reaffirmed the current legal framework and stated there are no plans to change the existing rules.
“Money borrowed by a self-managed superannuation fund under a limited recourse borrowing arrangement for the acquisition of an asset cannot be used to improve the value of the asset,” Chalmers stated.
“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.
“The government considers that the current settings strike the right balance between allowing trustees to maximise the returns in the superannuation funds and preserving superannuation for its purpose of providing retirement income.”
He also claimed borrowing “inherently adds risk” to retirement savings, despite the SMSF Association previously defending its use and presenting data suggesting the risks may be overstated.
“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,” he said.
“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, he noted this restriction does not apply to the use of SMSF funds outside of a borrowing arrangement.
“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. This is provided that the improvements do not fundamentally change the nature of the asset,” he said.
