In short: A self-managed super fund can borrow to buy residential or commercial property through a limited recourse borrowing arrangement (LRBA), where a separate bare trust holds the property and the lender's recourse is limited to that asset. You typically need a 20–35% deposit inside the fund, a corporate trustee, and enough balance left for liquidity. Rental income is taxed at 15% and capital gains at 10% after 12 months.
SMSF property is popular with self-employed Melbourne business owners who want to own their premises, and with couples who want a hard asset inside super. It also carries more rules than any other type of property lending. This guide explains the structure, the lender requirements, a worked example with Victorian duty, the tax treatment, and the breaches that cost trustees dearly.
The LRBA structure
Superannuation law forbids an SMSF from borrowing except through an LRBA that meets strict conditions. The property is held in a separate trust (usually called a bare trust, holding trust or custodian trust) until the loan is repaid, and the fund has a beneficial interest in it from day one.
| Party | Role | What it holds or does |
|---|---|---|
| SMSF (with corporate trustee) | Borrower and beneficial owner | Pays the deposit, receives the rent, makes loan repayments, claims the tax treatment |
| Bare trust (with its own corporate trustee) | Legal owner during the loan | Holds the title; does nothing else; transfers title to the SMSF once the loan is repaid |
| Lender | Provides the loan | Recourse limited to the property; usually requires personal guarantees from members |
| Members | Fund the deposit via contributions and rollovers | May give guarantees; cannot use the property personally (residential) |
| Accountant and auditor | Compliance | Prepares fund returns; audits the arrangement annually |
| Property manager | Manages tenancy | Rent must be paid to the SMSF's bank account, not to members |
Three rules sit on top of this:
- Single acquirable asset. One title per loan. A house on two titles, or a house plus an adjoining block, needs two arrangements.
- Sole purpose test. The property must exist to provide retirement benefits. No member, relative or related party may live in or use a residential property, even at market rent.
- Related party purchases. The fund cannot buy a residential property from a member or relative. It can buy business real property (commercial premises) from a related party at market value, and can lease those premises to a member's business at a market rent.
The ATO publishes its LRBA guidance at ato.gov.au.
What lenders require
SMSF lending is a specialist market. The big banks largely withdrew from it years ago; the lenders that remain apply tighter rules and higher pricing.
| Requirement | Typical position (varies by lender) |
|---|---|
| Deposit | 20–30% for residential; 30–35% for commercial |
| Minimum fund balance | Commonly $200,000 or more after the deposit and costs |
| Liquidity after settlement | Often 10% of the property value held in cash or liquid assets |
| Trustee | Corporate trustee for both the SMSF and the bare trust in most cases |
| Income counted | Rent (usually shaded), plus regular member contributions and existing fund earnings |
| Repayment type | Principal and interest common; interest-only sometimes available for a limited period |
| Loan term | Up to 30 years residential; 15–25 years commercial |
| Rate and fees | Higher than standard investment loans; higher establishment and legal fees |
| Guarantees | Personal guarantees from members are usual |
| Property type | Standard residential and commercial; no vacant land or construction under an LRBA |
Serviceability is tested inside the fund: rent plus contributions must cover the loan at the lender's assessment rate. A member's outside salary counts only to the extent it flows in as super contributions, which is why higher-income members with room in their concessional cap have more SMSF borrowing capacity. Our SMSF loans page lists what we need to prepare an application.
Worked example: $600,000 Craigieburn townhouse
Anita and Raj have $300,000 in their SMSF and want a residential rental.
| Item | Amount |
|---|---|
| Purchase price | $600,000 |
| Deposit (30%) | $180,000 |
| Victorian stamp duty (general rate: $2,870 + 6% of amount over $130,000) | $31,070 |
| Bare trust deed, legal review, lender legal fees, valuation, registration | approx. $8,000 |
| Cash out of the fund | approx. $219,070 |
| Fund balance remaining | approx. $80,930 (meets the lender's liquidity test) |
| Loan (70% LVR) | $420,000 |
Annual cashflow inside the fund
| Line | Amount |
|---|---|
| Rent ($500 per week) | $26,000 |
| Interest (for illustration, at 6.00% p.a.) | −$25,200 |
| Management, rates, insurance, water, maintenance | −$4,500 |
| Land tax (site value $250,000; trusts may face surcharge rates, confirm with the SRO) | −$975 or more |
| Pre-tax result | approx. −$4,675 |
| Tax effect at 15% | +$701 |
| Shortfall funded by contributions | approx. $3,974 per year |
On a principal and interest loan the repayment on $420,000 over 30 years is about $2,518 a month, so the fund needs around $30,000 a year of rent plus contributions to service it comfortably. Anita and Raj's employer super contributions alone exceed that. Run other price and rent scenarios in the investment property cashflow calculator and duty in the stamp duty calculator.
Tax inside super
| Phase | Rental income | Capital gain on sale (held over 12 months) |
|---|---|---|
| Accumulation | 15% | Effectively 10% (15% on two-thirds of the gain) |
| Pension (retirement phase) | 0% | 0% |
Compare that with an individual on the 32% or 47% marginal rate, and with the 50% CGT discount outside super. A property bought at 45 and sold at 65 in pension phase can be sold tax-free. The flip side: rental losses stay inside the fund and cannot offset your personal salary, so negative gearing in the usual sense does not apply. The capital gains tax on property explainer covers the individual rules for comparison.
Commercial property and your own business
The most powerful use of an SMSF LRBA is buying the premises your business operates from. The fund buys the warehouse in Campbellfield or the shop in Craigieburn, your company leases it at market rent on a written lease, the rent is deductible to the business and taxed at 15% in the fund, and the asset sits outside the business's creditors' reach. Lenders usually want a 30–35% deposit and a lease in place. See commercial property loans.
Costs and ongoing obligations
- Set-up: bare trust deed and corporate trustee, legal review of the loan documents, lender establishment fees. Several thousand dollars in total, paid by the fund.
- Ongoing: annual fund accounts and audit, ASIC fees for the trustee companies, property management, insurance held in the fund's name.
- Borrowing limits: the loan can fund purchase and repairs, but not improvements that change the character of the asset (no knock-down rebuilds, no adding a second storey with borrowed money). Improvements must be paid from existing fund cash.
- Contribution caps: funding a shortfall by contributing more is limited by the concessional and non-concessional caps.
SMSF property checklist
- Confirm the fund's investment strategy allows direct property and borrowing, in writing.
- Check the fund balance covers deposit, duty, costs and the lender's liquidity buffer.
- Set up a corporate trustee for the SMSF and a separate one for the bare trust before you go shopping.
- Get a lender pre-assessment based on rent plus contributions.
- Sign the contract in the name of the bare trustee, as trustee for the bare trust; the contract wording matters for duty and compliance.
- Have the bare trust deed dated correctly relative to the contract, per your lawyer's advice.
- Pay the deposit from the SMSF bank account, never from a member's personal account.
- Insure the property in the fund's name from settlement.
- Lease at market rent on a written lease, with rent paid to the fund.
- Diary the annual audit and keep every document.
Common mistakes
- Signing the contract in the wrong name. Fixing this after the fact can trigger double stamp duty.
- Borrowing to improve. Repairs are fine; a renovation funded by the loan breaches the rules.
- Buying a holiday house the family plans to use. It fails the sole purpose test outright.
- Leaving the fund illiquid. A vacancy plus an audit fee plus an insurance renewal with $5,000 in the bank is how funds end up in breach.
- Assuming any lender will do. Most will not lend to SMSFs at all; the ones that do have specific document requirements.
- Not planning the exit. Title must transfer from the bare trust to the fund at payout, and the fund must be able to hold the asset through pension phase.
Frequently asked questions
Can my SMSF buy a property to live in?
No. A residential property owned by your SMSF cannot be lived in, used or rented by any member, relative or related party, even at full market rent. This is the sole purpose test and the in-house asset rules. Breaches attract severe penalties and can make the fund non-complying, which taxes its entire balance at the top marginal rate.
How much deposit does an SMSF need?
Plan on 20–30% of the price for residential property and 30–35% for commercial, plus stamp duty and around $8,000 of set-up and legal costs, all paid from the fund. Most lenders also want the fund to keep a liquidity buffer after settlement. On a $600,000 Melbourne townhouse that means roughly $220,000 out of the fund and a balance of $300,000 or more to start.
Can I buy a commercial property through my SMSF and rent it to my business?
Yes. Business real property is the one asset an SMSF can acquire from a related party and lease back to one. The purchase must be at market value, the lease must be on arm's-length terms with market rent paid on time, and the fund must have the deposit and liquidity to support the loan. It is a common strategy for tradespeople, medical practices and retailers.
What is a bare trust?
A bare trust (also called a holding or custodian trust) is the entity that holds legal title to the property while the SMSF loan is outstanding. It has no active duties beyond holding the asset; the SMSF is the beneficial owner and receives all rent and gains. Once the loan is repaid, the title transfers to the SMSF, usually without further stamp duty if the arrangement was set up correctly.
Can I transfer my investment property into my SMSF?
Not a residential property; the fund cannot acquire residential property from a member or relative under any circumstances. A commercial property you own can be transferred in (as an in-specie contribution or a sale at market value), subject to contribution caps, stamp duty and capital gains tax on your side. Get accounting and legal advice before starting.
What happens to the SMSF property in retirement?
Once members move to pension phase, rental income and capital gains on the property are tax-free within the transfer balance cap. The fund can keep the property and pay the rent out as pension income, or sell it with no CGT. If the loan is still outstanding, repayments continue from rent and remaining fund assets, so most trustees aim to have the loan cleared well before retirement.
Talk to GNT Finance
SMSF lending is document-heavy and unforgiving of errors, which is where Gorakh Timilsina's background as a senior credit officer pays off: we prepare the file the way the lender's assessor expects to see it. GNT Finance arranges SMSF loans for funds across Melbourne, including Craigieburn and the northern suburbs, and works alongside your accountant and SMSF lawyer. Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.