SMSF audience guide
SMSF for property investors: LRBA, bare trust and the rules that matter
An SMSF is one of the few super structures that can hold direct property. Done right, it can be a tax-effective way to fund a residential investment, a commercial premises for your own business, or a long-hold development site. Done wrong, it's an audit problem and an ATO penalty. Here's how the structure actually works and what the rules require.
How SMSF property investing works
An SMSF can buy property outright or with a Limited Recourse Borrowing Arrangement (LRBA). With an LRBA, a separate bare trust is established to hold legal title to the property; the SMSF holds beneficial ownership and makes the loan repayments. The lender's recourse on default is limited to the property — the other SMSF assets are protected.
Residential property cannot be acquired from a related party (e.g. you can't sell your own investment property to your SMSF) and cannot be leased to a related party. Commercial property is more flexible: business real property — broadly, real estate used wholly and exclusively in one or more businesses — can be acquired from a related party and leased back, provided the rent is set at arm's-length commercial rates.
Whichever path you take, the property has to satisfy the sole-purpose test in section 62 of the SIS Act: the fund must be maintained for the sole purpose of providing retirement benefits. "Holiday house for the family" fails the sole-purpose test, even if it's also rented out — and the ATO is very willing to issue penalties on that breach.
- Hold residential or commercial property directly inside super
- LRBA for geared purchases — non-recourse lender, separate bare trust
- Business real property: acquire from related party + lease back at commercial rent
- Rental income and capital gains taxed at 15% in accumulation, 0% in retirement phase
- Sole-purpose test (s62 SIS Act) applies — no personal use allowed
- Specialist SMSF lender required — major banks have exited the market