Using SMSF borrowing to invest in real estate requires careful consideration. Even more so if the SMSF does not yet exist. This Frequently Asked question module provides you with information to assist you in your decision. It provides you with facts, not advice, and refers you to sources of additional information. The ultimate decision and responsibility is yours as trustee.
This FAQ is not a replacement for comprehensive financial planning advice. Where costs are estimated the SMSF portion is based on SMSF Alliance’s fees. The fees of other SMSF administrators or accountants will likely differ from those shown.
If you’d like to ask questions or have a chat about your intentions feel free to phone David Busoli, of SMSF Alliance, on 0499 778 584 or email him at dbusoli@smsfalliance.com.au.
A self-managed superannuation fund (SMSF) is a superannuation fund or trust where the members (there can be as many as 6) are the trustee/directors so control all aspects of the fund and its investments. That means that they have both significant flexibility and responsibility.
It Depends. Tax needs to be considered within the fund and personally when you withdraw from the fund. This discussion can be complex but, generally speaking.
Within the fund, expenses are deducted from income and the profit is taxed at 0% to 15% depending on how much of the fund balance is supporting a pension. Capital gains are taxed at 0% to 10% on a similar basis.
Personally, member withdrawals are tax free after age 60. Prior to that, member withdrawals are largely prohibited though there are circumstances where member benefits can be paid out, possibly with some tax levied, but these are outsside the scope of this FAQ.
Possibly. To be affected you will need to have over $3 million in superannuation benefits, counted across all funds you are a member of, by 30 June 2026 . Let’s assume you only have an SMSF so,
If your are affected then you will be personally liable for 15% tax on the growth in your assets attributable to the amount of your balance in excess of $3 million so, if your $3.5 million grew to $3.6 million, tax would be levied against you personally of $2,500.50. You could pay it yourself or elect for your SMSF to pay it.
This is the fundamental question. Ongoing SMSF fees are relatively fixed and may be about $3,500 per annum (they can be higher). The fees for an alternative superannuation structure will usually be percentage based so, if the combined balance of all fund members was $100,000, your SMSF would cost would be 3.5% per annum which will be far higher than an alternative. But, if your balance was $1,000,000 your SMSF fee will be 0.35% which is generally lower than the alternatives. You will need to do your own comparisons based on the combined balances of all the proposed members and the superannuation funds they are members of now.
Running an SMSF takes time while an alternative fund is largely “set and forget”. You can outsource most of this but the responsibility for your SMSF’s operation is always yours, as trustee.
We suggest you watch this video on the differences between SMSFs and other types of superannuation funds otherwise known as APRA funds. The ATO provides a course for SMSF trustees. It’s 44 minutes long and is time well spent, even if you already have an SMSF.
Probably, but not necessarily. There are various reasons why you, and any other intended members, may be excluded including
If any of these apply to you, or any other potential members, they need to be rectified before applying. Note that it would be unlikely that any of the last three items could be overcome. You might find this video useful.
If the trust deed allows it, yes, an SMSF can borrow using a Limited Recourse Borrowing Arrangement (LRBA) to invest in certain assets such as residential or commercial properties. The rental income, as well as contributions and income from other investments can be applied to repay the debt over time. SMSF borrowings are strictly for acquiring new investment assets and must comply with the regulations administered by the Australian Taxation Office (ATO).
Not really, SMSF borrowings do not have the same flexibility as borrowings you may be personally familiar with as this FAQ explains. There are also restrictions on the lender. If, when the asset is sold, there is a shortfall in the amount payable to the lender, they can’t call upon any other SMSF assets to make it up. This is why SMSF borrowings are called limited recourse borrowings (LRBAs). It is also the reason why major banks don’t generally provide SMSF loans. Be aware that, though lenders can’t take action against any other SMSF assets they may, as part of their loan terms, require you to provide a personal guarantee which would make you personally liable for any shortfall.
Yes, but such loans have very strict conditions, limitations and dangers that are outside the scope of this FAQ. Professional advice should be sought.
Yes, if the institutional lender offers these terms though loans are often principal and interest in nature.
The structure requires two entities, the super fund and the custodial or bare trust. The SMSF is the borrower but the bare trust holds the property title and provides the lender with the mortgage.
No, only the SMSF files a tax return. Because it has a 100% beneficial interest in the bare trust, any transactions in the bare trust are regarded as occurring in the SMSF. The bare trust does not even have a Tax File Number (TFN), Australian Business Number (ABN) or bank account as the SMSF’s bank account is used for all transactions.
Not technically, but an institutional lender will not lend to an SMSF that does not have a corporate trustee so you will need one. If you have an existing SMSF with individual trustees, you will need to alter this before applying for an SMSF loan. In any case, there are several reasons why a corporate trustee is to be preferred.
This video considers the differences between corporate trustees and individual trustees.
The law does not require a corporate trustee, but lenders will usually require one or they won’t provide the loan. There are other benefits though:
Note that the SMSF’s corporate trustee cannot also act as trustee for the bare trust.
Yes, but not from yourself, close relatives or business partners, associated companies or trusts. Also, you can’t live in it. Neither can the entities mentioned above. It can only be used for investment purposes. If you subsequently decide you wish to live in the property it must be removed from the fund. This may be by way of purchase or, if you qualify to access your superannuation benefits, as a lump sum benefit payment to you.
Yes, but not from yourself, close relatives or business partners, associated companies or trusts. Importantly, in the unlikely event that your SMSF could find funding, you can’t rezone or build on it until the loan is paid out and the property title is transferred from the bare trust to the SMSF.
Yes, you can even do so from yourself and associated entities. You can even rent it from your SMSF. Note that any acquisition from yourself will trigger stamp duty and capital gains tax. Importantly, the price you pay MUST be market value as evidenced by a registered valuer. You, and your relatives and associates, can occupy the property provided it’s for business purposes only and rent is paid to your SMSF at market value under market conditions in accordance with a written rental agreement. It is prudent for the rental amount to be confirmed by the registered valuer as well.
Generally, no. Each borrowing must be for the purchase of a single asset though there can be exceptions. If the acquisition is a substantial building that straddles two titles, then it could be classed as a single asset. If, however, the structure that straddled the titles was not substantial, such as a fence, the SMSF would require two separate purchases using two separate bare trusts. Note that the same bare trust corporate trustee could be used for each as it can act as trustee for both bare trusts.
No. The borrowing can only be used to acquire a new, separate asset. That means that an increase in equity in an existing SMSF property cannot be used to support a borrowing to purchase an additional property. Each property purchase must stand alone.
No. The borrowing can only be used to acquire a completed asset. The only way it can be involved in a property build is if the SMSF places a deposit on a contract for the land and building and pays no further payments until settlement of the completed property.
Builders with SMSFs may consider this approach as a way for their SMSF’s to acquire a completed property from themselves, but this would only be possible for a commercial property and, apart from stamp duty, the acquisition price would be the completed valuation, not the construction cost, which would usually result in capital gains tax for the builder.
Possibly, but there are restrictions. It cannot be funded by the borrowing and the property cannot change its fundamental usage. For example, a residential property cannot be converted to business use. This means that your SMSF cannot purchase a house and convert it to a dental surgery. The conversion would need to have occurred before the SMSF purchased it. Your SMSF could purchase a two-bedroom cottage and convert it into a five-bedroom mansion as it will still be used for residential purposes.
Not generally, except, potentially, where the purpose is specifically for repairs and maintenance. It’s safer to consider that reductions cannot be redrawn. Minimum principal and interest payments, as required by the lender, must be made but some SMSF lenders offer mortgage offset accounts as a solution.
After the lenders minimum monthly payments have been met, the interest on the outstanding balance is calculated after reducing it by the balance in the mortgage offset account. This has the effect of reducing the interest payable on the debt without actually decreasing the debt. The ATO have indicated this practice is acceptable provided that two conditions are met.
In the event of a default, lenders can only reclaim the specific property purchased with the borrowing; they cannot access other funds or rental income within the SMSF. They will deal with the property in a similar way to any other property in default. Presumably they will sell it to recoup their debt. SMSF loans are called limited recourse borrowings as the lender cannot claim any shortfall from the SMSF. Note that a lender may require the personal guarantees of the members. This would make you personally liable for any loan shortfall once the property is sold.
Once the debt has been repaid and the mortgage discharged, the SMSF can leave the property title within the bare trust or transfer ownership to the SMSF directly. Transferring the property will save the ongoing cost of maintaining the bare trust, not a significant amount, and allow the property to be rezoned, redeveloped or converted from one usage type to another (e.g. residential to commercial). The transfer will incur legal costs and possible stamp duty so, if a development or change of use is not intended, many SMSF trustees merely continue the ownership in the bare trust with the intent of eventually selling the property thereby avoiding these charges. The SMSF will still collect rental income in the usual way.
The process is much the same as it would be if you owned the property personally. The debt is paid out on settlement. Stamp duty and conveyancing costs are paid by the purchaser. The taxable capital gain will generally be subject to 10% tax if all members are in accumulation mode or zero tax if all members are in pension mode. Prorata treatment would apply if both membership types existed at the time. As is the case for any property sale, a clearance certificate is required.
The lower the loan to valuation ratio (LVR) the lower the risk. A 65% loan to valuation ratio would generally maintain a positive cash flow for a fully tenanted property.
Possible loan to valuation ratios will depend on a number of factors but generally;
Loan limits are generally between $100,000 and $4,000,000 (depending on the lender and property type).
Rural/Farm Property Considerations are subject to lower limits (around 50% LVR) with additional restrictions based on land size and location.
Yes but your SMSF investments must be made in accordance with a written investment strategy. The ATO cannot restrict what you invest in, provided it’s legally allowable, but they do require that you show you have made considered decisions evidenced within a documented investment strategy. Note that, though any investments must be made in accordance with the strategy, it can be altered as required. It must be reviewed, at least, yearly. Your SMSF’s auditor will check the investment strategy against the fund’s investments. It is useful for you to consider the specific points that must be addressed now, to ensure that you have made your decision based on proper considerations.
These are listed below using the description provided in the law.
Your SMSF’s investment objective must be to maximise retirement benefits for members. It must not be for any other purpose. Every investment is made with an expectation of profit but there is always a degree of risk. This is known as the risk/reward trade off as, generally, the higher the risk the higher the potential for profit – and for loss. Do you think this investment will do well and why?
Borrowing introduces an additional risk/reward consideration as it allows you to leverage your SMSF’s funds to purchase an asset of greater value than your SMSF’s member balances. This is called gearing. Note that gearing multiplies the effects of both profits and losses. For example, if you geared $100 by borrowing another $300 to purchase a $400 asset and that asset increased in value by 5%, that would be a $20 increase on your $100 which is a 20% profit. If it decreased in value by 5% that would be a 20% loss.
To experience either the profit, or the loss, the asset would need to be sold so your ability to choose the investment time frame is also important. You need to consider the quality of the investment, it’s likely return, and the time frame involved. You need to consider the SMSF’s cash flow requirements. What will you do if you lose your tenant? Your SMSF will still need to pay expenses and make its repayments. Will you have sufficient cash reserves? Can you make further contributions? Cash flow considerations are particularly important for an SMSF with a borrowing where the viability of the fund could be put at risk.
Are you prepared to except the lack of diversification and the dependence on a single asset to determine your SMSF’s investment performance and how do you intend to “rectify” the lack of diversification over time? Will additional contributions be invested in other asset classes? Heavy reliance on the performance of a single asset is both an opportunity, and a risk. The decision is yours, but you must show that you appreciate the risk.
If your SMSF needs cash urgently, and most of the fund is invested in a single property, are you prepared to sell the property quickly, possibly at a loss. Have you considered other plans such as the ability to make contributions, access a cash account buffer, liquidate other assets or access life insurance proceeds. The next two sections expand on this.
What is your expected time frame before benefit payments will be required? Will you have sufficient liquidity then? If the members are some time away from needing to access benefits this explanation is easier to provide however you will need to consider the unexpected, such as a member’s death or disability which is included in the next item.
The presence of a borrowing makes life insurance more of a consideration than it might otherwise be. It isn’t mandatory but, if there is none, you will need to explain why. Perhaps life insurance cover is being held external to the SMSF, including in another superannuation fund. Note that, though this may satisfy the member’s personal requirements, it does not necessarily deal with the SMSF’s potential need for additional liquidity as the life proceeds would not pay into the SMSF if it did not own the policy.
Your strategy must show that you have considered these items. It does not mean that you have adequately satisfied all considerations, just that you are comfortable with the decisions you have made and why. The ATO does not dictate what you can invest in but if, after due consideration, you are unable to reconcile your decision with the specific items noted, perhaps you should reconsider your plan.
If SMSF Alliance is providing ongoing administration services to your fund, you will be provided with an investment strategy documentation tool which, while not deciding on your investment strategy, will provide you with the means of documenting it to the ATO’s required standard. Other accountants or administrators may supply a similar service. If you would like assistance to create a comprehensive financial plan you should speak with a licensed financial planner.
All costs are payable by your SMSF so costs paid by you before the SMSF is established, may generally be reimbursed or processed as a member contribution.
Fees are variable depending on provider. Those shown are provided by SMSF Alliance.
You will need a
Your SMSF needs to show as complying on the ATO’s Super Fund Lookup site. If it is not, it’s probably because your SMSF’s tax returns are overdue. It can take a couple of months for it to be reinstated after they are lodged.
If the SMSF has a corporate trustee and an acceptable trust deed, you just need a Bare (Custodian) Trust with Trustee Company: $1,351
If not, you may also need
Note that, if you change trustees, it will be necessary for the names in which all existing investments are held to be changed to that of the new corporate trustee. You will need to attend to this.
Fees are variable depending on provider. Those shown are provided by SMSF Alliance.
Accounting & Audit Fees:
Additional Regulatory Fees (Paid by the SMSF Annually):
Property Related Fees include
If you do not have an existing SMSF you will need to establish this first. Once established, and approved by the ATO, you can establish the bare trust that will purchase the property.
A few points to note.
You can order these documents from numerous sources including from SMSF Alliance noted below.
For a new SMSF with a corporate trustee you will need to complete this application. It’s a digital application. Before you commence you might like to make sure you have all the information that will be asked for.
If SMSF Alliance is to act as the tax agent for the fund you will receive, each member will receive a mobile phone text with a link to an identity verifier to satisfy ATO requirements.
To set up the bare trust with a corporate trustee, after the fund has been established, you will need to complete this form.
If SMSF Alliance is the SMSF’s ongoing administrator we will liaise with the conveyancing lawyers, lender and other parties as required.
Once your SMSF has been properly registered with the ATO it will appear as complying on Super Fund Lookup. This is essential before your current fund can rollover your benefits. You can request the rollover from them directly or via your MyGov site. You will need your SMSF’s name and corporate trustee, bank account details electronic service address (ESA) and member number (if applicable) which will be available from your SMSF’s administrator. To prevent fraud, if the ATO’s records do not match the records you have provided, the rollover will not occur, otherwise it should happen within 3 to 5 days. SMSF Alliance will assist with the rollover if they are the appointed ongoing administrators for the fund.
Rolling over superannuation monies from your existing fund will cancel your life insurance as this cannot be rolled over. Should you lose this cover, it is possible that you may not be able to arrange new cover or, if you can, it may be on different terms and more expensive. You can choose to
SMSF Alliance do not provide life insurance advice but can provide a referral on request if you do not have an existing life insurance agent or financial planner.
If you have made personal concessional contributions that you wish to claim in your personal tax return, you will need to provide a S290-170 Notice of Intent to Claim to your current super fund before rolling over your account. If you don’t, you will lose your ability to claim the tax deduction. If this applies to you, you should speak with your existing super fund to make the arrangement.
Once the SMSF and Limited Recourse Borrowing Trust (bare trust) are operational, the contract can be signed by the corporate trustee of the bare trust (not the corporate trustee of the SMSF). The deposit should be paid by the SMSF. If it is paid personally, by the members, it will need to be reimbursed promptly or processed as a contribution to the SMSF.
At this time it is important that the bare trust deed be finalised with the inclusion of the property details as mentioned in the process description above.
In some circumstances the contract can be entered into before all the other structures have been established but this can cause serious issues and should be avoided.
The relevance of the bare trust commencement date is not consistent between the States but, to ensure you do not have any problems, it should be before, or on, the contract date.
An incorrect name on the contract will require a completely new contract, potentially jeopardising your negotiation leverage and/or exposing you to double stamp duty. The correct signatories, depending on the State in which the property is situated, are listed below:
| Jurisdiction | SMSF (Bare Trust) Borrowings |
| NSW | Holding Trustee Pty Ltd ACN XXX XXX XXX |
| VIC | Holding Trustee Pty Ltd ACN XXX XXX XXX or nominee |
| QLD | Holding Trustee Pty Ltd as trustee for Holding Trust Name |
| SA | Holding Trustee Pty Ltd ACN XXX XXX XXX |
| TAS | Holding Trustee Pty Ltd ACN XXX XXX XXX |
| WA | Holding Trustee Pty Ltd ACN XXX XXX XXX or Holding Trustee Pty Ltd ACN XXX XXX XXX for the SMSF Trustee Pty Ltd CAN XXX XXX XXX as trustee for Fund Name |
| ACT | Holding Trustee Pty Ltd ACN XXX XXX XXX |
| NT | Holding Trustee Pty Ltd ACN XXX XXX XXX as trustee for Name of Holding Trust as bare trustee for SMSF Trustee Pty Ltd ACN XXX XXX XXX as trustee for Fund Name ABN XX XXX XXX XXX |
A mistake here can cause delays and headaches so get the contract details right from the start.
To avoid delays and ensure a smooth transaction. Never use the following on the contract for SMSF property purchases with borrowings:
Consider pre-approval for an SMSF loan to expedite the purchase process and to avoid the cost of SMSF establishment if not approved. This may require you to gather two years of financial statements, tax returns (personal & business), and super statements (if already operational) for loan approval (3-4 weeks processing time).
You, and any other members, will need a director identification number before becoming a director on any new company so, if you don’t already have one, apply now as, without a DIN the corporate trustee establishment cannot proceed at all.
Establish your SMSF well before purchasing. Documents can generally not be signed electronically so consider mail delays as well as ATO random checking and biometric testing. The process can take between two and 10 weeks. The Bare Trust corporate trustee should be established at the same time as the SMSF. That way all documents, except the finalised bare trust deed, can be executed in one sitting.
Rollover funds from existing super accounts. This usually takes from 3 to 10 days.
Sign the purchase contract correctly and ensure the bare trust documents are in accordance with it.
Allocate at least 6 weeks (ideally 8 weeks) for processing between contract signing and settlement.