SMSF Property Investment

Buying a Residential Investment Property through an SMSF

SMSF Property Investments

Residential property can be the place you live at, holiday home/unit or a house rented to another person or family who live there. It is not dependent on how it is zoned but the zone would usually be residential and not commercial. A residential house can be used 100% to carry on a business (such as a small accounting practice or hairdresser) classifying the property as business real property (commercial). Different rules apply to commercial property. The points below assume that residential property is not business real or commercial property.

The benefits of buying property through SMSF are well publicised and include tax advantages from negative gearing, diversification within the SMSF and the degree of control over the investment that the trustee enjoys. Keep in mind we do not provide financial advice so although we are happy to explain the rules the fund must follow to ensure holding property in your SMSF remains compliant we do not comment or advise on clients investment decisions. 

Disclaimer: The information provided is a guide only and any purchase of residential property by the Fund should only be done after consultation with your SMSF Accountant or your Licensed Financial Adviser.

Pros and Cons of using SMSF to Buy Property

Can I buy an Investment Property in my Self-Managed Super Fund?

Short answer is yes you can buy a property in your superannuation fund. The big question is do the benefits of buying property in SMSF outweigh the costs in your unique situation. In deciding this the trustee will need to consider whether the investment fits within the investment objectives of the SMSF and is it going to provide regular income or capital gains on sale.  This analysis is about working out is SMSF property investment worth it in your personal financial situation. 

In making this decision you should consider how is it going to be managed and who is the Trustee buying the property from? Is the purchase allowed by the Fund’s trust deed? How is the property to be funded? Is the property being purchased directly by the Fund, held within a unit trust or company or held jointly with another party. Consider cashflow as residential property  is not easily liquidated.

As always there are a lot of rules to consider before you use an SMSF to purchase a property. 

Rules and Regulations: Can I Lease or Live in the property investment?

No a property through a Self-Managed Super Fund cannot be used personally in any way. Nor can the property be leased or lived in by your son, daughter, spouse, mother, father, other relative or other related party (usually a unit trust or company with close ties to the trustee or somebody the trustee is in partnership with).

TipA related party can be a member or relative of a member (including son, daughter, spouse, mother, father, grandparent, aunty, uncle, niece, nephew) or a unit trust/company where the member and Part 8 associates (can be a relative of a member, a partner of a member, trustee of a unit trust) can collectively control a unit trust or sufficiently influence a company.

TipAn unrelated party is a person or entity who is not a related party. Not a member or relative of a member or a person or persons who can collectively control a unit trust or sufficiently influence a company.

Can I Purchase My Investment Property with an SMSF?

When buying property through your SMSF you cannot buy it directly from yourself or from a related party even if the property value is fairly paid. This is regardless of whether the investment property may be leased to unrelated third parties the Fund is prohibited from acquiring a residential property from a member, trustee or a related party of the Fund. 

Using an SMSF to Invest in Property

Having discussed what we can’t do in detail lets look at how we do purchase an investment property using an SMSF. Property purchased through an SMSF from an unrelated third party is allowable under the super rules provided it meets the objectives of the investment strategy. There are various ways of purchasing residential property which are explored in detail below but the simple rules to remember:
  • All income and property expenses must stay within the Self-Managed Superannuation Fund
  • SMSF trustees cannot benefit in any way from the property or charge the fund for maintaining or managing the property
  • Property through an SMSF means you have to follow the many rules and regulations such as a prohibition of renting to related parties
  • The trustees need to carefully consider whether buying investment properties meet their financial goals
  • An SMSF can borrow using a Bare Trust is setup beforehand to keep the SMSF investment compliant. See below more information on what is known as the LRBA arrangements required to borrow money to fund a purchase.
  • Ownership of the Property has to be shown in the name of the Fund (if freehold) or Bare Trust (if there is a property loan)

Buy Property Investment using Cash in Self-Managed Super Fund

The purchase can be funded directly by cash from the Fund. The Fund may have sufficient cash to purchase the property or may be able to sell existing assets to release cash Consideration of capital gains tax implications, when selling Fund assets, is beyond the scope of this paper. The members can make contributions to the Fund to boost cash. Contributions to the Fund need to consider the members caps and the type of contributions. For more information about contributions please check out the tax office website at:

SMSF Loan – Limited Recourse Borrowing Arrangement (LRBA)

The super rules allow a Fund to borrow under very strict conditions. Simply, the LRBA limits the ability of the lender to only access the property and not the Fund’s other assets in the case of a default by the Fund. A separate property trust is established to hold the property on behalf of the Fund. The trust does not trade, receive rent or pay any expenses. The Fund is responsible for loan repayments, receiving rent and paying rental and borrowing expenses. Please refer to the ATO website for details on LRBA at: The advantages of an LRBA are found in the use of leveraging. The Fund can borrow from a bank or other lending institution, or from a member or related party, by using the property as security. The government, over the years, have capped the amount of contributions that can be made to a Fund. Borrowing is a way the members can get more into super without contravening the contribution caps. However, there are always risks involved which must be fully explored before going down this path. Borrowing from a lending institution is a bit more complex than borrowing personally. Higher interest rates and lower loan-to-value ratios are generally applied to an SMSF, but it does depend on the specific institution. The Fund will need existing cash reserves to make up the gap as well as a cash buffer for ongoing operating and borrowing expenses. The bank may require evidence of the expected contributions which can help fund the ongoing borrowing costs.

Tip – The major banks have stopped approving SMSF loans, but they are still available from some banks and other lending institutions.

Borrowing from a member or related party is possible. The complexity of a related party loan is in ensuring the terms and conditions reflect an arms length arrangement. The ATO have provided “Safe Harbour” guidelines. If the ATO guideline are followed the auditor and the ATO will accept the arrangement. Otherwise, the practical issues in providing evidence of what the loan terms should be, as if the loan was made from an unrelated party, can become very sticky from an audit perspective and if not done correctly can have dire consequences.

Tip – A new related party borrowing must be added back to a member’s total super balance (TSB) in proportion to the member’s share of the leveraged property.

Generally, a member’s TSB is the total member balance across all super funds. Add the member’s proportion of the borrowings owed at the 30 June to determine the updated TSB for the member.

The TSB, which is $1.9mil on 1 July 2023, is relevant to determine a member’s eligibility for using various super rules. One of the most significant is the ability to maximise the non-concessional caps (after tax contributions) which can be brought forward (Refer to the link for Contributions for further details).

Consultation with your SMSF Accountant or Licensed Financial Adviser, before entering into a borrowing arrangement, is highly recommended to avoid legal and compliance issues.

SMSF Property Investment via Non-Geared Unit Trust

Residential property can be purchased by a related unit trust provided certain conditions are met.

Some of the conditions include no borrowings by the trust, the residential property cannot be lived in or leased to a member or other related party and no charges allowed over the trust’s assets.

Members of a Fund and other related parties can pool their money in a non-geared unit trust to purchase a residential property. If the Fund does not have sufficient cash to purchase the units, it can use an LRBA to borrow money. It is very unlikely that a lending institution would lend monies in these circumstances. The trustee can borrow monies using a related party loan.

 

Tip – the residential property cannot be used as security. However, the units in the trust can be secured as part of a loan agreement. It is possible to register the units on the personal property securities register. The governments “Safe Harbour” guidelines do not extend to private unit trusts. The “Safe Harbour” guidelines in relation to listed trusts could be used as a guide to prepare the loan agreement BUT a private ruling to ensure the terms and conditions of the borrowing arrangement meet the tax offices criteria should be obtained.

Unrelated Unit Trust to access Property Market

A Fund can purchase units in an unrelated unit trust which can own residential property. An unrelated unit trust is not controlled by a member or related party, is able to borrow and can purchase residential property. The residential property could be used as security directly by the unit trust.

 

Tip – It is a common strategy for two unrelated SMSFs to establish a unit trust to purchase a property which allows the unit trust to borrow using the property as security. The ATO have acknowledged that two SMSFs could own a unit trust with each fund holding 50% of the units without giving rise to a related trust relationship. It is vital to check in with the Fund’s SMSF accountant or licensed financial adviser to avoid any compliance or legal issues.

Warning – Because the unit trust can borrow and use the residential property as security doesn’t mean a member or relative of the Fund can automatically lease the residential property directly from the Fund. Though In the right circumstances it might.

Managing Your SMSF Residential Property : Ongoing Obligations and Costs

Expect the auditor to request annual market valuations of the property which the SMSF must obtain from an independent party. This is a hot topic with the ATO at the moment given the amount of property held by the SMSF sector. The auditor is required to obtain evidence which is objective and verifiable from the Trustee. The ATO are no longer satisfied with a one line statement from the local real estate agent which merely says the property is valued at say $500,000. The tax office are looking for a brief analysis as to how the agent verified the market valuation. There are a number of ways evidence can be obtained but one of the most common is having the real estate agent provide additional data about similar properties that have been recently sold or alternatively use CoreLogic/RP Data reports which we organise for all our clients who have property investment through an SMSF.

A valuation must be obtained for underlying property owned in a unit trust or company structure. Similar to directly owned property a new valuation may not be required every year. It is possible the auditor will accept a prior year valuation if there have been no significant market events, natural disasters or substantial improvements to the property.

Tax Implications of using SMSFs to Purchase Property

The Fund pays 15% tax on rental income net of rental expenses that are tax deductible to the fund including property management expenses, repairs and maintenance, rates and insurance. Interest on a mortgage often result in large tax deductions and can produce tax losses which can be carried forward and offset against future taxable income. For new properties depreciation deductions can also be available which are one of the benefits of SMSF property investments. 

When it comes time to sell the property there is tax payable although a 1/3 Capital Gains Tax discount (unlike the 50% discount personally) will result in only 10% capital gains if the property was held for longer than 12 months. Any capital losses are quarantined against future capital gains. Furthermore, if the sale of a property occurs after the Fund goes into 100% pension mode there will be no tax on the capital gain at all. 

Tip – From a tax perspective it may not be a good strategy to enter into an LRBA arrangement if the members are in 100% pension mode. The Fund does not pay tax on income when in full pension mode and thus any tax deductions are lost.

Using an SMSF to Invest in Property: The Key Takeaways

  • Yes you can set up an SMSF or use your existing SMSF to purchase property
  • Within self managed super you cannot purchase residential property from a member or related party
  • Using a self-managed fund you cannot lease the rental property to a related party 
  • Using your SMSF to purchase a commercial property is also allowed
  • Direct property is a very popular type of investment and any accredited SMSF Specialist or SMSF lawyer should be able to assist you with understanding the process  and associated tax benefits
  • Before making any decision remember an SMSF can be expensive so make sure you understand the pros and cons of buying property and the costs involved 
  • Consider whether the property can provide for the SMSF members retirement benefits and whether investing in property within an SMSF is adequately covered by  your investment strategy  

Do you want to learn more about SMSF and Property Investment?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF and Property Investment? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about SMSF and Property Invesment?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Property Investment? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)