SMSF Home Loans — Property Through Super

Understanding SMSF Property Lending

A Self-Managed Super Fund can borrow money to purchase property through a structure known as a Limited Recourse Borrowing Arrangement (LRBA). This framework, permitted under the Superannuation Industry (Supervision) Act 1993, allows your SMSF to take out a loan to acquire a single acquirable asset — in this case, a residential or commercial property — which is held in a separate bare trust until the loan is repaid.

The "limited recourse" aspect means that if the SMSF defaults on the loan, the lender's recovery is limited to the property itself. They cannot access other assets within the SMSF, which protects the fund's diversified retirement savings. This protection comes at a cost — SMSF loan interest rates are higher than personal property loans, and deposit requirements are larger.

The tax benefits of purchasing property through an SMSF can be substantial. Rental income received by the fund is taxed at just 15% during the accumulation phase (compared to your marginal personal tax rate, which could be up to 47%). If the fund is in pension phase, the rental income may be completely tax-free. Capital gains on the sale of the property receive a one-third discount if held for more than 12 months during the accumulation phase, and are tax-free during pension phase.

The Bare Trust Structure

Every SMSF property purchase under an LRBA must involve a bare trust. This is not optional — it is a legal requirement. The bare trust is a simple trust structure where a separate trustee (usually a special-purpose company) holds legal title to the property on behalf of the SMSF. The SMSF is the beneficial owner and receives all the economic benefits of ownership (rent, capital growth), while the bare trustee holds legal title as a custodian.

The bare trust exists because the Superannuation Industry Act requires that the property being acquired cannot be held directly by the SMSF trustee while a borrowing is in place. Once the LRBA loan is fully repaid, the property is transferred from the bare trust to the SMSF trustee, and the bare trust is wound up.

Setting up a bare trust involves establishing a bare trust deed, appointing a corporate trustee for the bare trust (a $300-$500 shelf company is typically used), and registering the property in the name of the bare trust trustee. Your solicitor and accountant will coordinate this as part of the purchase process. The total cost of establishing the bare trust structure is typically $1,500-$3,000.

SMSF Property Rules You Must Follow

SMSF property investment is governed by strict compliance rules. Breaching these rules can result in the fund being classified as non-compliant, triggering significant tax penalties. Understanding and adhering to these rules is essential.

The sole purpose test: The property must be acquired and held solely for the purpose of providing retirement benefits to fund members. You cannot buy a property because you want to live in it later (while still working) or because it suits a family member.

No personal use: Fund members, their relatives, and associated entities cannot live in, holiday in, or otherwise personally use residential property owned by the SMSF. This includes short-term stays. Commercial property has an exception — a member's business can lease commercial premises from the SMSF at arm's-length market rent.

Single acquirable asset: Each LRBA can only be used to acquire a single property. If you want to buy multiple properties, you need separate LRBAs for each. The property cannot be a mixed-use asset.

No improvements during the LRBA: While the loan is outstanding, the SMSF cannot make significant alterations or improvements to the property that change its fundamental character. Routine maintenance and repairs are permitted, but renovations, extensions, or structural changes must wait until the loan is repaid.

Is SMSF Property Right for You?

SMSF property investment is not suitable for everyone. It works best when you have a substantial SMSF balance (ideally $250,000+ after the purchase to maintain diversification), a clear investment strategy aligned with your retirement timeline, the ability to cover loan repayments, expenses, and vacancies from the fund's cash flow, and access to quality professional advice (accountant, financial adviser, and solicitor experienced in SMSF).

The setup and ongoing compliance costs of SMSF property ownership are significant. Beyond the loan and purchase costs, you will need to pay for an SMSF audit each year, ongoing accounting and tax return preparation, bare trust administration, property management, and insurance. These costs must be justified by the investment return and tax advantages.

If your SMSF balance is smaller or you are approaching retirement age, the risks may outweigh the benefits. Concentrating too much of your retirement savings in a single illiquid asset creates vulnerability to property market downturns, vacancies, and unexpected maintenance costs. We recommend discussing your overall retirement strategy with a licensed financial adviser before proceeding with SMSF property.