An SMSF can purchase residential or commercial property as a fund asset, including through a limited recourse borrowing arrangement (LRBA) where the fund borrows to acquire it. Property in an SMSF is subject to strict SIS Act rules: the single acquirable asset rule, in-house asset test, related party restrictions, and bare trust requirements. Breach any of these and the fund is non-compliant. SMSFcentral administers SMSF property holdings from purchase through to sale: LRBA compliance monitoring, rental income processing, and expense management.
What’s Included
- LRBA compliance review: confirming the proposed borrowing structure meets s67A SIS Act requirements
- Bare trust (holding trust) administration and record-keeping
- Property settlement documentation and recording
- Rental income processing and bank reconciliation
- Property expense management: rates, insurance, body corporate, management fees, loan repayments
- Repairs vs improvements classification (this distinction has direct tax and compliance consequences)
- GST registration and BAS preparation for commercial property holdings
- Annual property valuation for financial statement preparation
- LRBA loan reconciliation and safe harbour interest rate monitoring
- In-house asset test calculations at 30 June each year
- Capital gains tax calculations on property disposal, including CGT discount and ECPI apportionment
Our Process
- Pre-acquisition review. Before the fund signs anything, we review the proposed structure. Is the property a single acquirable asset? Does the LRBA comply with s67A? Is the bare trust deed ready? Does the investment strategy allow this asset class and concentration level? Is there enough cash to cover loan repayments, expenses, and other fund obligations?
- Settlement processing. At settlement, we record the property acquisition in the fund’s accounts. The property is held in the name of the bare trustee (holding trustee), not the SMSF trustee. We verify that the title and loan documentation correctly reflect this structure.
- Ongoing administration. Throughout the year we process rental income, loan repayments (principal and interest), rates, insurance, property management fees, repairs, and maintenance. Every item is coded to the right account and tax category.
- Repairs vs improvements assessment. When the fund incurs property expenditure, we classify it as a repair (immediately deductible) or an improvement (capital in nature, added to the cost base). Under s67A, an SMSF cannot use borrowed funds to improve a property acquired under an LRBA. Only repairs are permitted. This classification is critical.
- Annual valuation. We arrange a market valuation of the property for the fund’s financial statements. The ATO requires market value every year, no exceptions. That means a formal valuation, a licensed agent’s appraisal, or for some property types, an automated valuation backed by comparable sales data.
- LRBA loan monitoring. We track loan balances, repayments, and interest rates. For related party loans (where the lender is a related entity), we check compliance with the ATO’s safe harbour terms to confirm the interest rate, loan term, and LVR sit within the prescribed parameters.
- Disposal administration. When the property is sold, we calculate the capital gain or loss, apply the CGT discount where applicable (the 12-month holding rule must be met), apportion ECPI for funds with pension-phase members, and process the loan payout and bare trust wind-up.
Limited Recourse Borrowing Arrangements: The Rules
Section 67A of the SIS Act is the only framework that lets an SMSF borrow. Outside s67A (and a few narrow exceptions), borrowing is prohibited. The key requirements:
Single acquirable asset rule
The borrowed funds must be used to acquire a single acquirable asset (or a collection of identical assets, such as a parcel of shares in the same company). For property: one property per LRBA. You cannot use one loan to buy two properties.
Bare trust structure
The property must be held on trust by a separate entity (the bare trustee or holding trustee) until the loan is fully repaid. The bare trustee holds legal title. The SMSF trustee holds beneficial ownership. Once the loan is repaid, legal title transfers from the bare trustee to the SMSF trustee.
Limited recourse
The lender’s recourse is limited to the asset acquired. If the fund defaults, the lender can seize the property but cannot claim against the fund’s other assets. This protects the members’ other super savings.
No improvements with borrowed funds
While the loan is outstanding, the fund cannot improve the property using borrowed money. Repairs and maintenance are fine. Replacing a broken hot water system is a repair. Adding a room, putting in a pool, or converting a house into units is an improvement. The ATO draws a hard line and it catches people out constantly.
Related Party and In-House Asset Rules
Related party property purchases. An SMSF can acquire business real property (commercial property used wholly and exclusively in a business) from a related party. Residential property cannot be acquired from a related party under any circumstances (s66 SIS Act).
In-house asset test. In-house assets (investments in or loans to related parties) must not exceed 5% of the fund’s total assets at 30 June (s82 SIS Act). If the fund leases property to a related party (e.g., a member’s business leases commercial premises from the fund), the property is generally an in-house asset unless it qualifies as business real property. If the in-house asset ratio exceeds 5%, the trustee must prepare a written plan to reduce it below 5% by the following 30 June.
ATO safe harbour loan terms. For LRBAs with related party lenders, the ATO publishes safe harbour terms annually. For 2025–26, the safe harbour terms require:
- Interest rate: the Reserve Bank of Australia’s indicator lending rate for standard variable housing loans (for residential property) or 5.10% (for commercial property, based on the average of major bank standard variable rates)
- Maximum LVR: 70% for residential property, 60% for commercial property
- Maximum loan term: 25 years for residential, 15 years for commercial
- Repayments: principal and interest (not interest-only)
Non-arm’s length terms (such as an interest-free loan from a related party) attract the non-arm’s length income (NALI) provisions, which tax the income derived from the arrangement at the top marginal rate (45%).
Common Pitfalls
This is one of the most common and most expensive mistakes. If the fund undertakes capital improvements to a property acquired under an LRBA while the loan is still outstanding, the entire borrowing arrangement breaches s67A. The ATO’s position is that this can make the fund non-compliant. The distinction between repair and improvement is fact-specific and must be assessed for every property expenditure.
An SMSF-owned residential property cannot be lived in, rented, or used by a member, a relative of a member, or any other related party. Not for a weekend. Not at market rent. Not at all. Commercial property can be leased to a related party’s business, but only at market rent with a proper lease in place.
The bare trust must be in place before settlement. The bare trustee must be a separate entity from the SMSF trustee. If the SMSF trustee ends up on the title instead of the bare trustee, the borrowing arrangement fails s67A. Fixing this after settlement (if it can be fixed at all) means stamp duty, legal fees, and ATO attention you do not want.
A fund with 80% of its assets in a single property and a member about to start a pension has a serious liquidity problem. The fund still has to pay pension minimums, meet loan repayments, cover property expenses, and pay audit and administration fees, all from the remaining 20% of assets (or rental income). We flag liquidity risks during the pre-acquisition review, not after settlement when it is too late.
Frequently Asked Questions
Not while it’s in the fund. An SMSF-owned residential property cannot be used by members or related parties. The member could potentially receive the property as an in-specie lump sum benefit on retirement (if the trust deed permits), but this triggers capital gains tax and stamp duty considerations.
Yes, several Australian banks and specialist lenders offer SMSF loans. The loan must be structured as a limited recourse borrowing arrangement under s67A, with a bare trust holding the property until the loan is repaid.
The fund must still meet loan repayments, rates, insurance, and other expenses. This is a liquidity risk that should be addressed in the investment strategy. SMSFcentral monitors cash flow and alerts advisers if rental income interruptions affect the fund’s ability to meet obligations.
Repairs and maintenance, yes. Capital improvements, not while an LRBA loan is outstanding. After the loan is fully repaid and legal title has transferred to the SMSF trustee, the fund can improve the property using the fund’s own money (not borrowed funds).
The ATO requires market value. For most properties, a licensed real estate agent’s written appraisal is sufficient for financial statement purposes. For unique or high-value properties, a formal valuation by a registered valuer may be appropriate. The valuation must be current, typically within 12 months of the reporting date.
No. Conveyancing is handled by the fund’s solicitor. We coordinate with the solicitor to ensure the bare trust deed, LRBA documentation, and settlement statements are correctly reflected in the fund’s records.
Related Solutions
- SMSF Setup: if the fund hasn’t been established yet
- SMSF Compliance and Day-to-Day Administration: ongoing administration including property transaction processing
- Valuations: annual market valuations for property and other unlisted assets
Before Your Client Signs Anything
Call 02 8412 0086 before the fund signs a contract. A pre-acquisition compliance review costs a fraction of what it takes to fix a structural problem after settlement.
Review and/or revision of SMSF trust deed to ensure it allows for residential or commercial property purchases and borrowing.
Creation and registration of Holding Trust and Security Trustee Company in line with LRBA regulations.
Assist with the loan application via the provision of SMSF documentation and information to the mortgage broker, as well as reviewing application information to ensure the details used are correct for compliance purposes.
Ensuring the correct name and date are on the contract of sale based on which state the property is purchased.
Facilitation of property purchase payments within deadlines e.g. deposit, settlement, valuation fees and legal fees.
Arrange the stamping of Holding Trust documentation as per the relevant state's laws.
Liaison with the property agent to ensure the correct names are on the rental agreement, and the rent is paid into the correct account to offset any loan repayments.