SMSF Insight: Thinking about buying property inside your Self-Managed Super Fund? Read this first. Guidance below reflects current Australian rules and best practice. For tailored advice, speak with Jean Marc Raffaut and the Factor1 SMSF team.
SMSF Property Investment Rules: Residential vs Commercial, LRBAs, and Arm’s-Length Evidence
Property can be a powerful asset in an SMSF, but it’s also where trustees most commonly run into trouble. Jean Marc Raffaut recommends treating every decision like an auditor will ask for proof tomorrow: document purpose, independence, and market value at every step.
Residential vs Commercial (Business Real Property)
Different rules apply depending on whether the property is residential or “business real property” (BRP). Residential property has strict related-party limitations; BRP offers more flexibility if everything is done at arm’s length.
| Rule Area | Residential Property (inside SMSF) | Commercial / Business Real Property (BRP) |
|---|---|---|
| Who can occupy or rent? | No members, relatives, or related parties may live in or rent the property. | Can be leased to a related party if it is genuine BRP and the lease is at market terms. |
| Personal use | Not allowed under any circumstances. | Not for personal use; only as business premises on commercial terms. |
| Arm’s-length requirement | All acquisitions, expenses, and income must be demonstrably at market value. | Same requirement; document independent rent/valuation and written lease. |
| In-house asset test (5%) | Generally not triggered if dealing with unrelated tenants. | BRP leased to a related party is not an in-house asset if it meets BRP definition and arm’s-length terms. |
Buying with Borrowing (LRBA) — What Trustees Must Get Right
Limited Recourse Borrowing Arrangements (LRBAs) allow SMSFs to acquire a single acquirable asset using a bare trust and limited-recourse loan. They require careful structuring, precise documentation, and ongoing arm’s-length evidence.
| Do | Don’t |
|---|---|
| Use a properly established holding/bare trust and execute documents in the right order. | Sign contracts in the SMSF trustee’s personal name or mix entities. |
| Ensure loan terms (rate, LVR, security, repayment) reflect market/benchmark conditions; keep evidence. | Use concessional/“mates-rates” loans — can trigger non-arm’s-length income (NALI) tax outcomes. |
| Limit works to repairs and maintenance using borrowed funds; major improvements usually require separate funding. | Use LRBA borrowings to fund significant improvements that change the asset’s character. |
| Keep all rent and expenses flowing through the SMSF bank account; document valuations and leases. | Pay LRBA expenses privately or allow rent to be paid to a personal/related account. |
Arm’s-Length Evidence (Rent, Valuations, Expenses)
Whether residential or commercial, every interaction must be on commercial terms. Collect independent evidence contemporaneously and keep it with your trustee minutes.
In-House Assets and Related-Party Transactions — The 5% Line
An SMSF’s in-house assets (loans to related parties, investments in related entities, and assets leased to related parties) must not exceed 5% of total assets at the end of the financial year. Business real property leased to a related party is generally not an in-house asset, provided it satisfies the BRP definition and arm’s-length conditions. Review percentages after revaluations and market movements.
| Counts Toward 5% | Typically Excluded |
|---|---|
| Loan to a related company or trust | Business real property leased to a related party on market terms |
| Units/shares in a related trust/company | Unrelated third-party lease arrangements |
| Assets leased to related parties (non-BRP) | Cash, listed securities, unrelated property investments |
Running Costs and Improvements — What the Fund Can Pay
The fund may pay legitimate property expenses that relate to producing retirement benefits (repairs, rates, insurance, property management, interest). For LRBAs, borrowed money is generally limited to repairs/maintenance — not significant improvements that change the asset’s nature. Keep tax invoices and link them to the lease/property file.
Quick Start Flow (From Idea to Settlement)
| Step | What to Prepare |
|---|---|
| 1. Fit-for-purpose check | Confirm sole-purpose test, investment strategy fit, liquidity, and cash-flow modelling. |
| 2. Structure | (If borrowing) establish holding/bare trust correctly; confirm trustee/corporate trustee details. |
| 3. Contracting | Execute in the correct entity; get legal review before signing. |
| 4. Finance | Document market-rate LRBA terms; lender letters; security docs; insurance. |
| 5. Settlement | Settlement statement to SMSF; titles recorded properly; post-settle file note. |
| 6. Lease & ongoing | Signed lease, market rent evidence, rent reviews, expense file, annual minutes. |
FAQs
Can my SMSF buy a holiday house and let my family use it occasionally?
No. Member/relative use of residential property owned by the fund breaches the sole-purpose/related-party rules.
Can my business rent commercial premises owned by my SMSF?
Yes, if it is genuine business real property and the lease is on commercial, arm’s-length terms with market rent and proper documentation.
Do I need a valuation every year?
You need evidence that the carrying value is fair each year, with a formal valuation when there’s a significant change or event. For rent, keep independent market evidence at review points.
General information only. Seek personalised advice. Structuring, tax and superannuation rules are complex and change over time.