SMSF Property Borrowing FAQ

A self-managed superannuation fund (SMSF) is a superannuation fund where the members (there can be as many as 6) are the trustees so control all aspects of the fund and their pooled investments. That means that they have both significant flexibility and responsibility. 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 about 44 minutes long and is time well spent. 

Probably, but not necessarily, and remember that all members must be eligible. There are various reasons why you may not be. These include

• being two years in arrears in lodging personal tax returns,
• previous difficulties you have had with the ATO,
• disqualification from being a director,
• conviction of an offense involving money,
• being an undischarged bankrupt.

If you think that you, or any of the other potential members, might be rejected then you need to consider ways that the issues can be dealt with. Notably, it would be unlikely that any of the last three items could be overcome. You might find this video useful.

The SMSF establishment process involves an application to the ATO for an Australian Business Number (ABN) and Tax File Number (TFN) as well as registration of the fund. It is quite possible that the ATO will contact you to ask you further questions. If they do you must speak to them (They’ll provide you with details that prove you aren’t being scammed) this video will give you an idea of what they’ll ask.

Not generally, but an institutional lender will not lend to an SMSF that does not have a corporate trustee. If you have an existing SMSF with individual trustees, you may 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.

• If your SMSF has a single member then the superannuation laws require that the SMSF trustee be either a company with one or two directors, or two individual trustees. If a sole member wants to have total control over their SMSF they can only achieve this with a corporate trustee.
• If your fund membership changes then this change must be reflected in the fund trusteeship. For individual trustees this means altering the SMSF deed and changing the title for every investment the fund holds. Some investment ownership details may be impossible to change so will require other legal remedies to comply with superannuation rules. Some bank accounts may even need to be closed and reopened in the new name. A corporate trustee merely requires a change to the company directorship as the name of the trustee does not change.
• Personal liability for accidents on the property can create personal liabilities for individual trustees. A corporate trustee will quarantine these.
• The ATO can levy administrative penalties if your SMSF is not operated according to the rules. Penalties range from $3,300 to $19,800. These are not paid by the SMSF but personally by the individual trustees or directors of the trustee company. For individual trustees, the penalties are levied on each trustee in full. For corporate trustees a single penalty is shared amongst all directors.

This video considers the differences between corporate trustees and individual trustees.

An SMSF loan, also known as a Limited Recourse Borrowing Arrangement (LRBA), allows your self-managed super fund (SMSF) to borrow funds for investing in assets such as residential or commercial properties. These loans enable you to leverage your SMSF’s funds, where rental income is used to repay the loan, and any excess returns are reinvested into the SMSF. SMSF loans are strictly for acquiring investment assets within the fund and must adhere to the regulations set by the Australian Taxation Office (ATO). Unusually, the SMSF is the borrower, but the property title is held in a separate bare trust, otherwise known as a custodial trust.

No, there are lots of differences. Your SMSF

• cannot increase the amount borrowed or drawdown an amount that has previously been repaid. This is not a line of credit facility.
• cannot access the equity in an existing property to support a new borrowing on an additional property. There can only be one loan per property.
• can repair or improve the asset, but not with increased borrowing. The SMSF will need to use its own resources.
• cannot change the fundamental nature of the asset such as by buying a vacant block and later building on it or strata titling a building. You can only do this once the loan has been repaid and the property title is moved to the SMSF trustee.
• can, for example, add an extra bedroom to a house or rebuild a house after a fire but it can’t change the house into a commercial premises.

SMSFs are generally prohibited from borrowing or giving a charge over an asset. Rather than remove this prohibition the government decided to allow SMSFs the power to borrow (provided the SMSF trust deed also allows this), under very strict conditions, provided the asset on which the mortgage is taken is not held by the superannuation fund and that the lender cannot sell anything up, other than the asset acquired, in the event of a default. That’s why this type of loan is called a limited recourse borrowing – the lender’s recourse is limited to the property though, if the members have given personal guarantees, they will be personally liable for any shortfall.

The law does not mandate a corporate trustee, but banks will usually require a company trustee for custodian trusts used with SMSF borrowings or they won’t provide the loan.

There are other benefits though:

• A dedicated trustee company offers an additional layer of legal protection for your SMSF investment if, for example, legal action arises due to an uninsured personal injury occurring on the premises.
• The same trustee company may be used for additional custodian trusts.

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.

It’s crucial to consult with a qualified financial advisor to determine if this strategy aligns with your overall superannuation goals and risk tolerance.

Yes, but the same acquisition and usage rules apply as for a house.

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 the occupation is for business purposes only and rent is paid to your SMSF at market value under market conditions in accordance with a written rental agreement.

No. The loan can only be used to acquire a completed asset. The only way this loan type can be involved in a property build is if the SMSF places a deposit on a contract for the completed building and pays no further payments until settlement of the completed property. This would require the builder to fund the construction out of their own resources. Builders with SMSFs may consider this approach as a pathway to their SMSF’s acquisition of a completed property from themselves, but this would only be possible for a commercial property and, apart from stamp duty, the acquisition price would need to be the completed valuation, not the construction cost, which could result in a considerable capital gains tax liability for the builder.

SMSF loans, offered by a select number of lenders, typically have higher interest rates compared to traditional home loans. This is because, in the event of a loan default, lenders can only reclaim the specific property purchased with the loan; they cannot access other funds or rental income within the SMSF. Note that a lender may require the personal guarantees of the members. This would make the members liable for any loan shortfall once the property is sold.

Once the loan is fully repaid, the SMSF can leave the property title with the bare trust or transfer ownership to the SMSF directly. Doing so will save the ongoing cost of maintaining the bare trust, though this is not a significant amount, and allow the property to be developed. The transfer will incur legal costs and possible stamp duty so, if a development is not intended, many SMSF trustees merely continue the ownership in the bare trust with the intent of eventually selling the property thereby avoiding conveyancing and stamp duty charges. The SMSF will still collect rental income in the usual way.

This will depend on a number of factors but, generally;

• Loan-to-Value Ratio (LVR) Limits:
  • Residential Properties: Up to 80% LVR (may vary by postcode and lender).
  • Commercial Properties: Typically 65% – 70% LVR (depending on the lender).
• Limited Recourse Loan Availability:
  • The major banks no longer offer SMSF limited recourse loans.
  • Focus on smaller and second-tier lenders for SMSF loan options.
• Loan Minimums & Maximums:
  • Minimum loan amounts typically start at $100,000.
  • Maximum loan amounts can reach $4,000,000 (depending on the lender).
• Rural/Farm Property Considerations:
  • Lower LVRs (around 50%) for rural/farm properties.
  • Additional restrictions based on land size and location.
• Borrowing Smart:
  • Consider a conservative borrowing strategy (e.g., 65% LVR) to maintain positive cash flow.
  • Ensure diversification within your SMSF investment strategy. A single property may not demonstrate sufficient diversification unless your investment incorporates this risk.

Additional Borrowing Option: Member-Financed LRBA

• SMSFs can borrow from related parties for property purchases under strict guidelines but generally to a maximum of 70% LVR on a principal and interest loan with monthly payment for a maximum of 15 years.
• This option incorporates a number of additional rules and complexities and requires specific advice outside the scope of this page as very significant penalties can apply if the loan is not implemented and administered correctly.

Who signs for an SMSF property purchase depends on two crucial factors:

• Property Location: State regulations can impact the purchaser’s name.
• SMSF Borrowing: Financing the property affects the contract signatory.

Avoid Contract Errors! A mistake here can cause delays and headaches. Get the contract details right from the start. This guide empowers you to navigate the SMSF property purchase process with confidence.

Avoid delays and ensure a smooth transaction. Never use the following on the contract for SMSF property purchases with borrowings:

• SMSF Name
• Individual SMSF Trustees
• SMSF Members
• Variations with “or Nominee” unless the property is in Victoria

Proactive Planning is Key!

Establish your bare trust trustee company before signing purchase contracts. An incorrect name on the contract with loan involvement requires a completely new contract, potentially jeopardising your negotiation leverage and/or exposing you to double stamp duty.

Knowing the right time to date your bare trust deed is crucial to avoid any tax implications or delays. This guide will break down the state-by-state variations in dating a bare trust deed for your SMSF property purchase.

• The date for your bare trust deed depends on your state.
• Dating it incorrectly can lead to double stamp duty (NSW, TAS & ACT).
• Here’s a quick reference by state:
  • QLD & NT: Before or on the contract date.
  • NSW, ACT & TAS: After the contract date.
  • VIC & WA: After the contract but before settlement (VIC allows between contract & settlement for nominee purchases).
  • SA: After the contract but before settlement.

For states like NSW, ACT & TAS, dating the trust deed after the contract ensures you avoid double stamp duty. In other states, you have more flexibility.

While the process is similar to a personal purchase, additional steps are involved.

Pre-Purchase Checklist:

• Secure Financing: Gather two years of financial statements, tax returns (personal & business), and super statements (if already operational) for loan approval (3-4 weeks processing time).
• Establish Your SMSF: Obtain an ABN (Australian Business Number) – typically within 28 days but can take up to 56 days (often faster with pre-registration checks).
• Fund Your SMSF: Rollover funds from existing super accounts – usually processed within 3 -10 days by APRA funds.

Streamline the Process:

• Pre-Approved Loan: Consider pre-approval for an SMSF loan to expedite the purchase process and to avoid the cost of SMSF establishment if not approved.
• Early SMSF Setup: Establish your SMSF well before purchasing to avoid delays.
• Holding Trust Setup: Setting up a holding trust for the purchase can be completed within 24 hours in most cases.

Settlement Timeline:

• Contract Signing to Settlement: Allocate at least 6 weeks (ideally 8 weeks) for processing between contract signing and settlement.

Considering buying property with your SMSF? Understanding the costs involved is crucial for informed decision-making. This guide provides a transparent breakdown of estimated expenses:

Essential Establishment Costs (Paid by SMSF):

• New SMSF with Trustee Company: $2,200 (Learn More: How to Set Up an SMSF)
• Custodian Trust Documents (Bare Trust/LRBA): $1,500 (Ensures Legal Compliance)

Additional Considerations:

• Financial Advisor Fee (Optional): $3,000 – $4,000 (Gain Expert Guidance)
• Legal Conveyancing: $1,000 – $2,000 (Varies by Solicitor)
• Lender Legal & Loan Fees: $1,500 – $2,500 (Subject to Lender)

Investing in property with your SMSF? Understanding ongoing accounting costs is essential. This guide breaks down estimated annual SMSF fees when you hold property using a Limited Recourse Borrowing Arrangement (LRBA).

Accounting & Audit Fees:

• Typical Annual Cost: $3,300 (including independent audit)

Additional Regulatory Fees (Paid by SMSF Annually):

• ATO Supervisory Levy: $259 ($518 in the first year) – Paid with the annual tax return.
• ASIC Annual Review Fee – SMSF Trustee Company: $63
• ASIC Annual Review Fee – Bare Trustee Company: $310

Transparency & Up-to-Date Information:

• Fees are current as of 1 January 2025
• ASIC fees are indexed annually

Rolling over all your SMSF from your current provider means you will lose your life, TPD or income protection insurance. It cannot, generally, be transferred to your SMSF. You may be able to retain cover by leaving a sufficient balance and by continuing to make contributions. Rules vary so you would need to discuss this with your current provider. Note that, 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 more expensive.

Ensure you have, at least, a pre-approval for the loan amount. It would be unfortunate if you set up the SMSF only to find you can’t get the loan.

If you have made personal concessional contributions to your current superannuation fund, 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.

SMSF investing must always be ONLY for the purposes of providing retirement benefits. There can be no other personal purpose such as buying a commercial property from you to reduce your personal debt or buying a house for your daughter to live in while she’s at university, even if she is paying rent.

Yes. SMSF Alliance is our preferred service provider. The firm’s Principal, David Busoli, is one the SMSF sectors most accomplished practitioners. Feel free to do your own web search. He was one of the original team that established the sector’s peak body, the SMSF Association, and holds its Fellow designation. The rest of the management team, Debbie Thomas LLB, Head of Technical, and Emma Walker, General Manager, also hold the SMSF Association’s Specialist designation.

SMSF Alliance don’t administer SMSFs as one of many accounting tasks, it’s all they do, so they ensure they keep up to date with all the changing rules including their dangers and opportunities. Their purpose built, secure, online portal sets sector standards for communication and fund management tools. Their on time ATO lodgement record is to such a high standard that it has been recognised by the ATO.

They can answer any SMSF question but have chosen not to become licensed financial planners. As such they cannot provide comprehensive strategic advice directly to you, so they support your planner to provide quality SMSF services by assisting with education and, on request, strategy assessment and development with the aim of optimising your SMSF experience.

They have excellent personal relationships with ATO team members which means they can be more effective than most in mitigating the effects of trustee mistakes. This is important considering that the ATO’s preferred deterrence approach is to levy administration penalties on trustees, in their individual capacity, ranging from $1,650 to $19,800. 

They take cyber security very seriously. Not only do they ensure that their systems are appropriately protected, but team members also undergo weekly cyber security training, in addition to being subjected to random, fake, spam and phishing attacks to test their response.

There are services that are both significantly cheaper and dearer than theirs. Their fees are based on service levels, types of investments and, most importantly, how easy it is to access audit standard data. They don’t compromise on delivering a quality result and have priced their services accordingly.