Borrowing Inside an SMSF: What to Know Before You Consider Property Investment

Buying property through your SMSF can be a great strategy, especially if you’re looking to invest in business premises. But SMSF borrowing comes with strict rules, added complexity, and often higher costs.

Before you start the process, it’s important to understand what’s actually allowed and where the risks lie.

How SMSF Borrowing Works

Your SMSF can borrow to purchase a single investment asset (or a group of identical assets with the same market value), but only through a Limited Recourse Borrowing Arrangement (LRBA).

This means:

• The loan is used to acquire a specific asset. One Loan = One Asset
• The asset is held in a bare trust by a second corporate trustee
• If the SMSF defaults, the lender’s recourse is limited to that asset only
• The property cannot be used as security for any other borrowings, nor can other property be used as security for this purchase
• The SMSF still receives the income and expenses from the asset, but doesn’t hold legal title until the loan is repaid

This structure incurs additional setup and legal costs compared to a regular property purchase and must be established from the outset to avoid compliance issues.

Business Property vs Residential Property

The most common strategy is purchasing commercial or business property, especially if your business will lease the premises from your SMSF. This is allowed under certain conditions and can be a legitimate strategy to build retirement wealth while paying rent to your own fund.

Residential property, on the other hand, has far more restrictions:

• You cannot live in the property yourself
• Your family members cannot live in or rent it (even at market rate)
• You cannot buy a residential property that you already own and transfer it into the fund
• There are limits to developing vacant land or building from scratch
• You cannot make major changes to the property, such as subdividing land off the back, demolishing and building, or adding extensions

In short, SMSFs are designed for passive investment, not development or personal use.

Vacant Land and Construction Are Not Allowed

An SMSF cannot use borrowed funds to purchase vacant land with the intention of building. Likewise, you cannot:

• Purchase land and construct a building using borrowed funds
• Buy a property and then improve it significantly (e.g. adding a second dwelling or changing it from residential to commercial)
• Subdivide the land component into more than one asset (ie, subdivide a block off the back or side of the existing dwelling)

Doing so changes the nature of the asset and breaches the LRBA rules.

Repairs and maintenance are generally fine. But improvements or renovations that change the asset’s character are not.

Be Careful with Multiple Titles

If a property has more than one title, the ATO may view it as multiple assets, which can be problematic under SMSF borrowing rules.

Always obtain legal and accounting advice before signing anything. What appears to be a single property may not be treated as such by your lender, auditor, or the ATO.

Deposit Requirements and Structuring Tips

SMSF loans usually require a larger deposit than traditional loans, often 30% or more. You’ll also need enough liquidity in the fund to cover:

• Loan repayments
• Ongoing property expenses (rates, insurance, maintenance)
• Potential periods without rental income
• Other SMSF obligations (like paying pensions or meeting minimum balances)

All of this should be factored into your investment strategy before committing.

Timing Matters

We usually raise the idea of SMSF property early in the financial year, and that’s no accident.

You need time to:

• Review your investment strategy
• Arrange the right legal structure
• Move contributions into the fund (within the cap)
• Secure pre-approval and confirm serviceability
• Understand the implications for your year-end planning

If you’re thinking about buying property through your SMSF, it’s not a last-minute decision. The lead time matters.

What Happens When the Loan is Repaid?

Once the SMSF has paid off the loan in full, the legal ownership of the asset is transferred from the bare trust to the SMSF trustee. At that point, the fund holds full legal and beneficial ownership of the property.

The asset stays in the fund and continues to be managed under superannuation law. You may decide to retain it as a growth asset or, later, sell it as part of your retirement planning.

It is important to note that you cannot use the equity in the property to then leverage into another property purchase. That would require a new loan, a new deposit of at least 30% in cash, etc.

Do You Want to Learn More?

We can review and discuss the purchase of a property through an SMSF and help you determine if an SMSF is the right fit for your goals so that you can make a confident and informed choice. Get in touch.