What are SMSF Loans & Can You Buy a House?

New legislation passed in June means you can no longer set up a borrowing arrangement through your Self-Managed Super Fund to purchase a house or residential investment property after approximately 10 August.

The Treasury Laws Amendment (Tax Reform No. 1) Act received Royal Assent on 26 June, and the provision restricting new Limited Recourse Borrowing Arrangements involving residential property takes effect 45 days later. Your SMSF can still own residential property outright without borrowing, and existing loan arrangements already in place are protected under grandfathering provisions. Commercial property loans remain available.

If you were considering using super to buy investment property and had started preliminary conversations but haven't yet formalised the arrangement, the timing matters more than you might think.

How Limited Recourse Borrowing Arrangements Work

A Limited Recourse Borrowing Arrangement allows your SMSF to borrow money to acquire an asset, with the loan structured so that only the purchased asset is at risk if the loan defaults. The asset is held in a separate bare trust until the loan is fully repaid, at which point legal ownership transfers to the SMSF. Investment returns flow to the fund during the loan period.

Under the SIS Act, superannuation funds are generally prohibited from borrowing. Sections 67A and 67B created an exception for LRBAs, provided strict conditions are met. The borrowed money must be used to acquire a single asset or a collection of identical assets with the same market value. You cannot use borrowed funds to improve an existing SMSF asset or place an asset you already own into a borrowing arrangement.

Consider a member who accumulated a balance approaching $600,000 and wanted to use an LRBA to purchase a unit in Oakleigh South as a long-term retirement investment. They arranged a 70 percent loan through a specialist SMSF lender, with the unit held in a bare trust and rental income directed to the fund. The borrowing met the sole purpose test because the property was acquired purely to generate retirement income and capital growth, with no member or related party occupying the property. The loan repayments were funded from a combination of rental income and ongoing concessional contributions.

What Changed Under the New Residential Property Restriction

From approximately 10 August, new LRBAs can only be used to acquire real property that satisfies the definition of business real property under section 66 of the SIS Act. Residential property does not meet that definition.

The change does not prevent your SMSF from owning or acquiring residential property. It prevents new borrowing arrangements to fund that purchase. You can still buy a house or unit outright using existing fund balances, subject to the usual rules, including that the property cannot be acquired from a related party and cannot be occupied by a fund member or anyone related to a member.

Existing arrangements that were legally entered into before the commencement date are protected. Whether an arrangement has been entered into is not determined solely by the exchange of a contract. The surrounding circumstances, documentation, loan approval, and trust deed execution all factor into whether the arrangement qualifies for transitional protection. Speak with a licensed SMSF specialist if you were partway through a residential purchase as at early August, as the ATO had not published updated guidance on all aspects of the new law as at late July.

Can You Still Use an SMSF to Buy Commercial Property?

Yes. SMSF commercial property loans are not affected by the residential borrowing restriction. Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the entity holding the property.

Whether a property qualifies as business real property depends on its actual use at the time of acquisition, not how it is marketed or zoned. A warehouse leased to an operating business, a medical clinic occupied by practitioners, or a retail shopfront tenanted by a cafe would generally satisfy the definition if used wholly and exclusively for business purposes. A property with a residential component, such as a mixed-use building with a shop downstairs and a flat upstairs, may not qualify, or may only partially qualify, depending on the specific facts.

A property on multiple titles cannot be acquired under a single LRBA unless the properties are identifiable as a single asset, meaning they have equal market value and are bought and sold together. You cannot use one loan to acquire two adjoining commercial units on separate titles, even if they are substantially similar.

If your SMSF leases commercial property to a related party, the lease must be on arm's length terms at market value. Business real property leased to a related party is excluded from the in-house asset rules, which makes it one of the few situations where a fund can have a direct financial relationship with a member's business.

How Rental Income and Capital Gains are Taxed in Your SMSF

A complying SMSF is taxed at 15 percent on its assessable income, including rental income and net capital gains. Where an asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain.

The actual tax you pay depends on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year. Capital losses can only be offset against capital gains, not against rental income.

If your SMSF has commenced a pension and the assets are fully segregated as current pension assets, a capital gain on disposal of those assets is disregarded. Where the fund uses the proportionate method because it holds both accumulation and pension interests, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate. The outcome depends on whether minimum pension payment requirements have been satisfied and the fund's specific circumstances at the time of disposal.

From 1 July, Division 296 tax applies where a member's total superannuation balance at the end of the financial year exceeds $3 million. An additional 15 percent tax applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to earnings above that level. Both thresholds are indexed in subsequent years.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. An unrealised increase in property value does not produce assessable income or Division 296 fund earnings. Rental income and realised capital gains may contribute to the calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

Refinancing an Existing SMSF Loan

The residential property restriction does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. However, the ATO had not published updated guidance as at late July on the circumstances in which a refinancing might be treated as a new LRBA under the post-commencement rules.

Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, or changes to the ultimate beneficiaries may all end an existing arrangement. A new arrangement entered into after the commencement date would be subject to the post-commencement rules.

If you are considering refinancing an SMSF loan on a residential property, obtain advice before proceeding. Practical Compliance Guideline PCG 2016/5 sets out arm's length terms for SMSF LRBAs and includes safe harbour interest rates that the ATO updates annually. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent.

Refinancing of commercial LRBA arrangements is not affected by the residential restriction. The refinanced loan must still relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms.

What Happens If You Default on an SMSF Property Loan

In the event of a default, the lender's recourse is limited to the asset being acquired under the arrangement. The lender cannot pursue other SMSF assets or the personal assets of the trustees, provided the limited recourse character of the loan is maintained.

A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement. If the guarantee extends beyond the single asset, the LRBA may not meet the conditions under sections 67A and 67B of the SIS Act.

Offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance, provided they are genuine offset accounts and not redraw facilities.

If you are weighing whether to proceed with a commercial property purchase using your super or explore other structures such as debt recycling or releasing equity from an existing property, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions