The Easiest Way to Buy Property with Your Super Fund

Buying property through your self-managed super fund gives you control over a long-term asset that can generate rental income taxed at 15 per cent or less.

Since August, the rules around what you can borrow to buy have changed. If you're setting up a new loan, you can only finance business real property through a Limited Recourse Borrowing Arrangement. That includes commercial premises, industrial warehouses, and certain residential properties used wholly and exclusively in a business. Residential investment properties purchased for standard rental income no longer qualify for new borrowing arrangements, though you can still buy them outright if your fund has the cash.

For Griffith residents with established super balances, this often means looking at commercial opportunities in town rather than the residential market. The Banna Avenue retail strip, industrial sites near the airport precinct, and agricultural service buildings around the region all fall within the updated borrowing rules, provided they're leased or intended for lease to a business tenant.

What Changed in the SMSF Borrowing Rules

From 10 August, any new loan taken out by your super fund to buy property must be secured against business real property. The property needs to meet that definition when you enter the loan and throughout its life. If a commercial tenant vacates and you decide not to re-lease the premises, the property stops meeting the definition and your fund breaches the borrowing prohibition.

Loans arranged before that date are unaffected. You can maintain or refinance those arrangements without meeting the new business real property test, even if the property is a standard residential rental. If you exchanged a binding contract to buy a property before 10 August but settled afterward, the old rules still apply.

Consider a buyer who exchanged on a residential property in July with finance approved in September and settlement in October. That arrangement is allowed because the contract was binding before the cut-off date, even though the loan was entered into afterward.

How a Limited Recourse Borrowing Arrangement Works

Your super fund borrows money to buy an asset, which is held in a separate bare trust until the loan is repaid. The fund holds a beneficial interest in the asset and takes legal ownership once the debt is cleared. The lender's recourse is limited to that specific asset, meaning they cannot pursue other fund assets if the loan defaults.

The borrowed funds can cover the purchase price, loan establishment costs, stamp duty, and ongoing maintenance or repairs. You cannot use the loan to improve the property. Each drawdown for capital works creates a new borrowing arrangement, which must meet the rules in place at the time of that drawdown.

Most lenders require a deposit of at least 30 per cent, though some will lend up to 80 per cent of the property value depending on the asset type and the fund's financial position. SMSF loans generally attract higher interest rates than standard investment loans because of the limited recourse structure and the additional legal requirements.

Commercial Property in Griffith That Qualifies

Business real property means land and buildings used wholly and exclusively in one or more businesses. A shopfront leased to a retail business, a warehouse leased to a logistics company, or an office leased to a professional service firm all meet the definition. The property must be used that way when you enter the loan and for the entire loan term.

In Griffith, that typically includes retail premises along Banna Avenue, industrial sites in the airport and northern industrial precincts, and agricultural service buildings such as cool stores, packing sheds, or machinery storage facilities leased to farming operations. Rural land used in a primary production business can also qualify, even if it contains a dwelling, provided the dwelling sits on no more than 2 hectares and the main use of the whole property is not domestic.

If you lease the property to a related party, such as your own business, it becomes an in-house asset unless it qualifies as business real property. In-house assets cannot exceed 5 per cent of your fund's total assets, so structuring the lease correctly matters.

How Your Fund Pays Tax on Rental Income and Capital Gains

Rental income earned by your super fund is taxed at 15 per cent during the accumulation phase. If a member has moved into pension phase and the property supports that income stream, the rental income may be fully or partially exempt depending on how the fund calculates its exempt current pension income.

When you sell the property, any capital gain is taxed at 15 per cent, or 10 per cent if the fund held the asset for at least 12 months and qualifies for the one-third discount. If the asset supports a pension and is a segregated current pension asset, the gain may be fully exempt.

From 1 July, Division 296 tax applies to members with a total super balance above $3 million. This is an additional 15 per cent tax on the portion of your total super earnings that relates to the balance above that threshold, and a further 10 per cent on amounts above $10 million. The tax is assessed to you personally but can usually be paid from your super fund. Importantly, the outstanding loan balance under a Limited Recourse Borrowing Arrangement is not included in your total super balance for Division 296 purposes, which can reduce the amount of earnings subject to the additional tax.

Refinancing an Existing SMSF Loan After the Rule Change

If your fund entered a loan before 10 August, you can refinance it without needing the property to meet the business real property definition. Refinancing means entering a new loan contract for the same asset, either with your current lender or a new one.

Significant changes to the loan terms can end the original arrangement and create a new one, which would then need to meet the current rules. Minor variations such as adjusting the interest rate, extending the loan term within reason, or switching between variable and fixed rates are generally not treated as a new arrangement. Transferring the asset to a new holding trust, however, usually creates a new arrangement.

In our experience, members refinancing to access a lower rate or consolidate other super fund debt can do so provided the core terms remain consistent and the property was financed under the pre-August rules. If you're considering a refinance, the lender and your super fund's administrator will need to confirm the arrangement maintains continuity.

Setting Up the Loan and Trust Structure

The property must be held in a bare trust separate from your SMSF. The trustee of that bare trust holds legal title until the loan is repaid, at which point title transfers to the super fund trustee. The bare trust cannot be a discretionary trust, and your super fund must be the sole beneficiary.

You'll need a loan agreement that clearly states the lender's recourse is limited to the property, a trust deed for the bare trust, and an acquisition strategy that demonstrates the purchase meets the sole purpose test. That means the property must be acquired to provide retirement benefits to members, not for any current-day benefit such as personal use.

A related party can provide security for the loan, but their recourse must also be limited to the asset. If a family member guarantees the loan and the fund defaults, the lender can only pursue the property and the guarantor's obligation, not other assets held by the fund.

Lenders typically require an independent valuation, evidence that the purchase price reflects market value, and confirmation from the fund's auditor or administrator that the transaction complies with superannuation law. Expect the loan process to take longer than a standard investment loan because of the additional legal steps.

Deposit and Borrowing Capacity for Your Fund

Most lenders will finance up to 70 or 80 per cent of the property value, depending on whether it's commercial or residential business real property. A commercial premises in Griffith might attract a maximum loan-to-value ratio of 70 per cent, meaning your fund needs a 30 per cent deposit plus costs.

Your fund's borrowing capacity depends on its existing balance, the rental income the property is expected to generate, and whether members are making ongoing contributions. Lenders assess serviceability by looking at the fund's cash flow, not your personal income. If the fund cannot demonstrate it can meet loan repayments from a combination of rent, contributions, and existing income, the lender will not approve the loan.

Some lenders will accept a limited recourse loan where the fund makes interest-only repayments for a period, which can help with cash flow during the early years. Principal and interest repayments reduce the loan balance faster and build equity in the property, but they require stronger cash flow within the fund.

Choosing Between Commercial and Residential Business Property

Commercial property tends to offer longer lease terms and tenants who maintain the premises as part of the lease agreement, but it also comes with higher vacancy risk if a tenant leaves. A retail shopfront on Banna Avenue might sit vacant for months if the previous business closes and the local market is quiet.

Residential property used wholly and exclusively in a business, such as a house leased to a company for employee accommodation or a short-stay accommodation property operated as a business by the tenant, can qualify under the updated rules. The property must be used that way when the loan is entered and throughout the loan term. If the tenant vacates and you rent it to a family on a standard residential lease, the property no longer meets the definition.

Most SMSF borrowing in regional areas now focuses on commercial and industrial assets because the use is clearer and the risk of accidentally breaching the business real property test is lower. For Griffith, that often means premises leased to agricultural service providers, logistics companies, or established retail businesses.

Call one of our team or book an appointment at a time that works for you. We work with SMSF lenders across the country and can help you understand whether a particular property and loan structure will meet the current rules, and whether it fits your fund's investment strategy and cash flow.

Frequently Asked Questions