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SMSF property lending basics
Important advisory
SMSF property lending is a complex area involving superannuation law, tax, property and credit regulation. This article is for general information only. We strongly recommend you engage independent legal, financial and tax advisers before making any decisions about borrowing within an SMSF.
SMSF property lending is a complex area involving superannuation law, tax, property and credit regulation. This article is for general information only. We strongly recommend you engage independent legal, financial and tax advisers before making any decisions about borrowing within an SMSF.
What is an LRBA?
A Limited Recourse Borrowing Arrangement (LRBA) is the only way an SMSF can legally borrow to purchase an asset. Under an LRBA, the asset is held in a separate holding trust until the loan is repaid. If the SMSF defaults, the lender's recourse is limited to the asset in the holding trust — it cannot access other SMSF assets. Once the loan is fully repaid, the asset transfers from the holding trust into the SMSF.
Previous rules
- LRBAs could be used to purchase residential or commercial property
- Both property types held in a separate holding trust until loan repaid
- All standard SMSF compliance rules applied
Current rules
- New LRBAs restricted to business real property (commercial) only
- Residential property can no longer be purchased via a new LRBA
- Existing residential LRBAs are fully grandfathered — no forced unwind
Key rules and requirements
Under current ATO rules, new LRBAs are limited to business real property (commercial). See the ATO website for effective dates. The rules below apply to all LRBAs; additional notes indicate where residential rules apply to existing arrangements only.
Under current ATO rules, new LRBAs can only acquire business real property — residential property borrowing is no longer permitted for new arrangements (see ato.gov.au for effective dates)
The property must be a single acquirable asset — generally cannot borrow to purchase multiple assets
The property must meet the sole purpose test — it must be held to provide retirement benefits to members
Existing residential LRBAs: the property cannot be lived in by fund members or related parties (sole purpose test still applies)
Business real property (commercial) can be leased to a related party at market rent
All contributions, rental income and loan repayments must flow through the SMSF's bank account
The SMSF must have adequate cash flow to service the loan and meet ongoing expenses
The fund must remain compliant under the SIS Act — annual audits are required
Is your SMSF ready to borrow?
Your fund has an adequate balance — lenders typically require a minimum fund balance
Your SMSF trust deed permits borrowing and LRBA arrangements
You have a corporate trustee or individual trustees in place
The fund is fully compliant and has a current audit
You have obtained advice from an SMSF specialist and/or financial adviser
You have engaged a solicitor familiar with SMSF and LRBA structures
Important risks and considerations
New LRBAs for residential property are no longer available under current ATO rules — only commercial (business real) property LRBAs remain available to new borrowers (see ato.gov.au for effective dates)
Division 296 tax: members with super balances above the current ATO threshold may face an additional tax on earnings attributable to the excess, including unrealised capital gains on property held in the fund — see ato.gov.au for current thresholds, rates and implementation status
SMSF lending is not available from all lenders — the market is limited and criteria are strict
Non-compliance with LRBA rules can result in the ATO making the fund non-complying — with significant tax consequences
Rental income earned inside the SMSF is taxed at the standard super accumulation rate — higher-balance members may also face Division 296 tax (see ato.gov.au for current rates and thresholds)
If you or a related party live in or use the residential property (existing arrangements), the fund may fail the sole purpose test
Ongoing compliance requirements (audits, tax returns, valuations) add cost and complexity
Market downturns can leave the fund with a negative equity position — debt is still owed
This is a long-term structure — early exit may involve costs and complexity
Documents typically required for SMSF lending
SMSF trust deed (including all amendments — lenders read the deed carefully)
Most recent 2 years of SMSF financial statements
Most recent SMSF tax return and ATO notice of assessment
Member statements showing current balance and contributions
Trustee ID — all individual trustees or directors of a corporate trustee
SMSF ABN and TFN
Property contract of sale or details of the target property
Accountant or auditor details
Evidence of LRBA-compliant holding trust structure (your solicitor prepares this)
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General information only
This article is for general information purposes only and has been prepared without taking into account your objectives, financial situation or needs. It does not constitute credit advice, financial advice or a recommendation. You should consider whether this information is appropriate for your circumstances and obtain independent advice where necessary. K&M Solutions and Services Pty Ltd (ACN 649 305 126) is not a credit provider and does not hold an Australian Credit Licence. Enquiries may be referred to licensed credit brokers or referral partners. Credit assistance, if required, is provided by appropriately licensed credit representatives or Australian Credit Licence holders. This platform does not provide credit approval, a credit offer, financial advice, or legal advice.
This article is for general information purposes only and has been prepared without taking into account your objectives, financial situation or needs. It does not constitute credit advice, financial advice or a recommendation. You should consider whether this information is appropriate for your circumstances and obtain independent advice where necessary. K&M Solutions and Services Pty Ltd (ACN 649 305 126) is not a credit provider and does not hold an Australian Credit Licence. Enquiries may be referred to licensed credit brokers or referral partners. Credit assistance, if required, is provided by appropriately licensed credit representatives or Australian Credit Licence holders. This platform does not provide credit approval, a credit offer, financial advice, or legal advice.