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Make Use of Your SUPERFUND

Borrowing to buy property with your SMSF

Borrowing to buy a property through an SMSF is achieved through a limited recourse borrowing arrangement (LRBA).


To ‘limit the recourse’ of the lender, a separate property trust and trustee is established to hold the property on behalf of the super fund, outside the actual SMSF structure. All the income and expenses of the property go through the super fund’s bank account. The super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as a recourse, and cannot access any remaining assets of the super fund.

Borrowing criteria for SMSFs

Borrowing criteria for an SMSF is generally much stricter than a normal property loan that you might take out as an individual. The loan also comes with higher costs, which needs to be factored in when working out if the investment is worthwhile.

Currently, the general consensus is that most financial institutions will not consider lending to an SMSF unless they have a balance of at least $200,000.

If your primary purpose for wanting to have an SMSF is to purchase property with a mortgage then consulting with a bank or mortgage broker is strongly recommended before you even establish the super fund, to identify if you have sufficient funds to obtain finance.

Remember that loan repayments must be made from your SMSF. This means your SMSF must always have funds available to meet the loan repayments. The SMSF can fund the loan repayments through rental income on the property and through superannuation contributions into the fund.

Continued compliance

SMSFs need to value all of their assets at market value, and the valuation needs to be based on objective and verifiable data. If an SMSF holds commercial property, a real estate agent or registered valuer will need to provide an independent valuation.

If the commercial property produces a gross rental income in excess of $75,000 per annum, the fund will also need to register for GST.  Once the SMSF is registered for GST, it can claim 100% of GST on any expenses associated with the commercial property.

Once the property begins to produce a rental income, it will be taxed at 15%. If the property is sold (after owning it for more than 12 months), 10% capital gains tax will apply. If the SMSF is in pension phase and the sale fits within the member’s $1.6m balance cap, then no capital gains tax is payable.

Given its appeal for small business owners, commercial property continues to make a compelling case from a tax planning and long-term capital growth perspective. However, with all investments, there’s a flip side. Issues such as lack of investment diversity and liquidity considerations of holding one ‘lumpy asset’ needs to be weighed up when choosing commercial property for your SMSF.

You are responsible for compliance

The ability to purchase property in your SMSF with borrowings comes with some very strict rules and obligations that you may not be familiar with as they are not requirements that exist outside an SMSF.

It is very common for trustees to inadvertently breach these rules, as many trustees are not aware of the rules until their fund is audited.

It is up to you as a trustee to make yourself familiar with what you can and can’t do, as the ATO will hold you responsible.

There can often be expensive repercussions for not quite getting it right – from trustee penalties issued by the ATO to stamp duty implications.

All trustees are personally liable for any decisions made by the fund, even if they engage a third party to assist, or another member/trustee makes a decision. It is therefore really important to engage experienced, qualified specialists to assist you when taking on the role of managing your own retirement savings.


Purchase the property in the correct name

The property must be purchased and held in the name of the trustee of the bare trust. Many people purchase the property first and then subsequently set up their SMSF and associated legal entities to arrange finance for settlement of the property. Failure to purchase the property in the correct name may lead to expensive stamp duty implications.

Renovating your property

Simple insignificant repairs and maintenance to the property can be paid for from borrowed monies. If you wish to do significant improvements or renovations to the property, this is allowed but must be funded by available cash already held within the super fund and not by the loan or borrowed money.

You are not allowed to make significant changes to the original asset that was purchased using the limited recourse borrowing arrangement. Renovations that substantially change the asset will require a new limited recourse borrowing arrangement.

Single acquirable asset

The concept of ‘a single acquirable asset’ is very important when dealing with a limited recourse borrowing arrangement (LRBA). The basic premise is, if the property runs over multiple titles, each title will require its own bare trust, trustee and LRBA.

The ATO has clarified certain scenarios that it is permissible to have just one LRBA, and where multiple LRBAs would be required.

Single LRBA is required in these scenarios:

  • Factory complex that runs over multiple titles and therefore cannot separately sell titles

  • House and land package

  • Completed ‘off the plan’ property – if cash paid for the deposit, an LRBA can be used to pay balance

  • Apartment with separate car parking space – although separate titles you can’t sell one without other, so one LRBA is ok

  • Option to purchase a house (just the option) – if the house is then purchased, this must be done with a separate arrangement as a different asset to the option.


Multiple LRBAs required in these scenarios:

  • If the vendor will only sell the two titles together (but it is legally permissible to sell them separately)

  • Farmland with multiple titles – if no legal impediment to selling them separately

  • A block of land purchased – at a later date it is decided a house is to be built on a block

  • A serviced apartment that is fully furnished – the apartment and furniture are seen as two separate assets.


Fees and charges when purchasing property

There can be substantial fees and charges associated with the purchase, ownership and subsequent sale of a property in an SMSF. These will eat into your super balance so you need to ensure the income in the super fund will cover these costs and allow for growth.

Many people assume that if they contribute personal money into the purchase, that once the super fund has the money, they can repay themselves. This is not the case. You may contribute your own money to help purchase the property, but this is considered a personal contribution to your super fund and cannot be withdrawn until you meet the preservation age.