A Self-Managed Super Fund (SMSF) can be a powerful tool for purchasing property as part of your retirement strategy. However, there are strict rules and requirements to ensure compliance with superannuation laws. Here’s what you need to know before investing in property through an SMSF.
Can an SMSF Buy Property?
Yes! An SMSF can purchase residential or commercial property, but there are important conditions:
The property must be for investment purposes – You cannot live in it or rent it to family members.
The purchase must comply with the ‘sole purpose test’ – It must provide retirement benefits to SMSF members.
If borrowing is required, a Limited Recourse Borrowing Arrangement (LRBA) must be used – This means the loan is secured against the property only, not other SMSF assets.
Residential vs. Commercial Property in an SMSF
Residential Property Rules
- You (or any related party) cannot live in the property – It must be rented to an unrelated tenant.
- You cannot buy a property you already own and transfer it into your SMSF.
- The property must meet strict compliance rules set by the ATO.
Commercial Property Rules (Including Business Premises)
- Your SMSF can lease commercial property to your own business, as long as it’s at market rates and complies with SMSF regulations.
- This can be a great way for business owners to own their business premises through super, rather than paying rent to an external landlord.
How Does Borrowing Work?
If your SMSF does not have enough cash to buy a property outright, it can take out a loan under a Limited Recourse Borrowing Arrangement (LRBA).
Key points about SMSF loans:
- The loan is secured only against the property (not other SMSF assets).
- Not all lenders offer SMSF loans – They often require higher deposits (e.g., 20-30%).
- Lending terms and interest rates may differ from standard home loans.
Pros & Cons of Buying Property with an SMSF
Potential Benefits:
- Tax advantages – Rental income is taxed at a concessional rate of 15%, and 0% in pension phase.
- Capital gains tax (CGT) discounts may apply if the property is held for more than 12 months.
- Business owners can own their commercial premises within super while paying rent to their SMSF.
Things to Consider:
- Strict rules & compliance – Heavy penalties apply for breaches.
- Liquidity issues – Property is an illiquid asset, meaning cash flow management is crucial.
- Loan restrictions – Limited borrowing options and stricter lending requirements.
- Ongoing costs – SMSFs require ongoing administration, audits, and potential legal/financial advice.
Minimum Requirements for an SMSF Loan (Limited Recourse Borrowing Arrangement – LRBA)
1. SMSF Structure Requirements
Must have a valid SMSF – The fund must be set up and compliant with ATO regulations before applying for a loan.
A separate Bare Trust (Custodian Trust) is required – This trust holds the property on behalf of the SMSF until the loan is fully repaid.
Corporate trustee preferred – Most lenders require the SMSF to have a corporate trustee, rather than individual trustees, for lending purposes.
2. Deposit & Loan-to-Value Ratio (LVR)
Residential Property:
- Minimum deposit: 20%–30% of the property value.
- Maximum LVR: Typically 70%-80%, meaning you’ll need at least 20%-30% in super as a deposit plus extra funds for costs.
Commercial Property:
- Minimum deposit: 30%-40% of the property value.
- Maximum LVR: Typically 60%-70% (some lenders may allow up to 75%).
- If leasing to your own business, it must be at market rates.
Tip: Some lenders may require extra liquidity in the SMSF (e.g., at least 10% of the loan amount in cash reserves after purchase).
3. Loan Eligibility & Serviceability
SMSF must prove serviceability – The fund must show it can afford the loan repayments from:
Rental income from the property
Super contributions from members
Existing SMSF investment income (e.g., shares, term deposits, other assets)
Minimum SMSF balance: Some lenders require a minimum balance in the SMSF, usually $200,000–$250,000+ before considering a loan application.
Minimum loan amount: Typically $150,000-$200,000, depending on the lender.
4. Other Key Requirements & Costs
Extra Funds for Costs – You’ll need additional funds in your SMSF to cover:
- Stamp duty
- Legal and conveyancing fees
- Bank fees and loan setup costs
- SMSF compliance, audits, and ongoing admin
Property must meet lending rules
- Must be a single asset – The SMSF can only borrow for a single acquirable asset (e.g., one property).
- No major renovations allowed – Borrowing is for purchasing only, not major improvements.
- Strict arms-length rules apply – The property cannot be lived in or rented to a related party (for residential properties).
5. Loan Features & Interest Rates
Lenders offering SMSF loans
- Not all banks offer SMSF loans – mainly specialist lenders and some major banks.
- Interest rates are generally higher than standard home loans (e.g., 6%–8%+).
Fixed or variable rates available – Some lenders allow interest-only periods.
Loan repayments are made from the SMSF – You cannot personally fund repayments, as all loan servicing must come from the SMSF itself.
Is Buying Property Through an SMSF Right for You?
Investing in property via an SMSF can be a smart strategy for the right investor, but it’s not suitable for everyone. It’s important to weigh up the benefits, risks, and compliance obligations before making a decision.
Would you like to explore your options further? Let’s chat and see if this strategy aligns with your financial goals.
Disclaimer:
This page provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
Licensing statement:
Credit Representative 540557 is authorised under Australian Credit Licence 389328