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20 things you need to know about undertaking borrowing inside a SMSF to acquire property


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Borrowing inside a SMSF has been an attractive option for many people considering the acquisition of property, whether it be commercially (i.e. for their business) or for residential investment.  Whilst SMSF borrowing can be an attractive option to consider, it has a range of important features that people need to be aware of when structuring such an arrangement.

New laws have now taken effect to borrowing inside superannuation from 7 July 2010, including the introduction of section 67A & s67B (repealed s.67(4A)).  For Trustees and professionals, you need to be acutely aware of the relevant Superannuation, Income Tax, GST and Corporations Law requirements (and trust deed) and how they impact any property purchase (or transfer of property) inside a SMSF.

To assist in understand some of these important issues, I have provided a list of 20 items below that need to be considered for a property purchase inside a SMSF.

  1. Your trust deed must allow for the borrowing in accordance with section 67A & 67B (no longer s.67(4A)), in particular that the trustee has power to borrow, grant security & allow assets to be held by custodians/nominees for the trustee.
  2. The trustee of the SMSF cannot be the trustee of the custodian trust (bare trust) – must be a separate trustee.  Would typically recommend a separate corporate trustee to act as the Custodian Trustee.
  3. The Custodian Trustee, Custodian Trust and SMSF must be in existence as at the date of purchase.  In certain circumstances, you may need to find a ‘shelf company’ for the Custodian Trustee to demonstrate that it was in existence at the time of the property acquisition (if property is already acquired).  The Custodian Trust would be dated as at the date of purchase.
  4. The Fund’s investment strategy needs be updated/prepared to consider the risk, liquidity, diversification and ability to discharge assets as and when they fall due.
  5. Need to consider how the loan is to be financed?  Bank loan or BYO banker NB. BYO Banker – you are the lender using existing equity to provide a loan to your SMSF (back-to-back loan).  As a guide, the SMSF is going to have to provide capital of at least 20% of purchase price for residential and at least 30%-35% for commercial.
  6. You need to consider the terms and conditions of the SMSF loan including duration, interest rate, interest only (IO) or principal and interest (P&I), loan-to-value-ratio (LVR).
  7. The Custodian trust is a bare trust.  It does nothing other than hold the property (or asset) for the beneficial owner, being the SMSF.  It does not require an ABN or TFN.
  8. All income generated from the property is deposited directly into the SMSF bank account just as all expenses attributable to the property are paid from the Fund (not by the Custodian Trustee).
  9. The borrowing is a limited recourse loan.  The lender or any other person under the arrangement only has rights in respect to the acquired asset.  All other assets of the SMSF are protected.
  10. The bank can (and will) ask for a personal guarantee in respect to a loan.  The guarantor needs to consider the risks inherent with undertaking such a guarantee.  The guarantor can be a fund member, however any shortfall paid by the member in their capacity as guarantor may constitute a contribution (and count towards the contribution caps)
  11. You can now refinance an existing SMSF loan if you can get a better deal (e.g. interest rate, terms, etc)
  12. You can only acquire one property in the Custodian Trust.  Only the land and building.  No Chattels that may accompany an acquisition (this would require a separate borrowing arrangement).  The law allows only for the acquisition of an “asset” (singular) or collection of identical assets.
  13. You can use borrowings to repair and/or maintain the property, not improve.   However, SMSFR 2011/D1, now confirms that you can improve an asset using existing super fund monies (or own resources where the amount would likely be treated as a contribution.
  14. You cannot obtain borrowings for the development of the property.   This does not constitute a replacement asset.  However, you can consider a limited recourse borrowing to acquire units in a SISR13.22C trust (to acquire property and develop) – see article, “property development using an SMSF Instalment Warrant”.
  15. Borrowed money can be applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset.
  16. Each state has different rules regarding stamp duty on the transfer of the property from the custodian trust to the SMSF.  You should seek expert legal advice on this matter upfront to save yourself potential double stamp duty!!
  17. There is no CGT upon transfer of the asset from the Custodian Trust to the SMSF (as there is no change in beneficial ownership).
  18. The acquired asset can be sold at any time by the trustee.  It does not require the loan to be repaid in full prior to selling the asset.  Proceeds of sale pay off the debt, with the remaining monies being transferred to the SMSF as beneficial owner of the property.
  19. An extension to an original borrowing may or may not constitute a refinance.  You need to consider the nature and extent of the variation and the intention of the two parties.
  20. Terms and conditions relating to a BYO Banker loan arrangement must be done on an ‘arms-length’ basis.  It must adhere to the requirements of s.109 of superannuation law.  Therefore, you would expect a commercial rate of interest on the borrowing.

There is no doubt that there are plenty more aspects to give consideration to when it comes to SMSF limited recourse borrowing arrangements.  Each transaction is unique and has its own peculiarities to consider.  Unlike the establishment of an SMSF, these arrangements are simply not an “off the shelf” solution.

These types of borrowings are gaining momentum and for the consumer it is of utmost important to ensure that the arrangement has been appropriately structured and operating correctly to ensure that it complies with superannuation law.

There is no substitute for obtaining expert advice…



4 thoughts on “20 things you need to know about undertaking borrowing inside a SMSF to acquire property

  1. Great post Aaron – good summary of information and it answers a lot of the FAQs people will likely have about SMSF borrowings.

    I have had a few people tell me recently that SMSF borrowings are no good because you can’t tap into any equity that builds up in the property held by the custodian trust and use it as a deposit for further properties and hence the snowball effect that almost every single property spruiker and their disciples preach cannot happen.

    I believe you can (kinda) – the SMSF just has to sell the property and realise the investment (and any built up equity) to fund further purchases – the trustees just have to ensure that any resulting investments perform at least as well if not better than the one they sold!

    The downside is obviously transaction costs – but I believe that the superb tax savings that investing via a SMSF offers greatly outweighs these costs in the long run.

    I would be interested to hear your response / ideas in regards to getting that ‘snowball effect’ happening within super.


    • Hi Kris,

      I agree with you that structured appropriately you can use limited recourse borrowings to acquire multiple properties. Whilst you note that the trustee may wish to sell and then repurchase, I think a more appropriate strategy would be to pay minimal repayments with a view to using SGC, salary sacrifice and rental amounts to build up and acquire further property. This sensibly also can provide for a level of diversification within the fund, however it becomes self defeating if the trustees then wish to go and acquire another property.

      Whilst the arrangements are limited to the acquirable asset, the bank will consider the total assets of the fund in determining the LVR, servicing, etc. if you have a $500k property now worth $800k, this additional benefit will get factored in by the bank to determine the appropriate level of coverage, both from an asset and income servicing point of view.


  2. Umm… sorry for the dumb question, but other than the asset protection aspects what are the most substantive benefits in going to all this trouble ? A few words of not many syllables is all that is required …

    • Hi David,

      You haven’t asked a dumb question, because this strategy does need to consider certain variables to stack up. Some of the potential benefits include no CGT (if sold in pension phase), repayment of debt using pre-tax dollars, ability to leverage to accelerate fund growth due to concessional contribution caps reduction, I could go on… In an SME business there are a range of advantages to operate your business from within this geared property. Where the asset is outside the fund and is transfer in under such an arrangement, you may be able to turn non-deductible debt into deductible debt!! it’s about as powerful as it gets!!


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