Using an SMSF to invest in property can be attractive, particularly for business owners who want their fund to own commercial premises. However, SMSF property purchases are subject to strict rules.
An SMSF generally cannot borrow money unless a specific exception applies. The most common borrowing structure is a limited recourse borrowing arrangement, or LRBA.
What is an LRBA?
An LRBA allows an SMSF to borrow money to acquire a single acquirable asset. The asset is generally held in a separate holding trust while the loan is outstanding.
The arrangement is called “limited recourse” because the lender’s rights are limited mainly to the asset acquired under the arrangement. The lender generally cannot access the SMSF’s other assets if the loan defaults.
New rules from 10 August 2026
Legislative changes applying from 10 August 2026 restrict real property acquired under an LRBA to business real property.
The property must be wholly and exclusively used in one or more businesses when the LRBA is entered into and must continue to meet the business real property requirements for the life of the arrangement.ato
This is highly relevant to trustees considering residential property, mixed-use property or development projects.
Contracts exchanged before 10 August 2026 may be subject to transitional treatment, so the timing and documentation of the transaction should be reviewed carefully.ato.gov
Key LRBA requirements
An LRBA must be carefully structured. Trustees need to consider:
- Whether the asset is eligible.
- Whether the arrangement relates to a single asset.
- Whether the holding trust has been correctly established.
- Whether the loan documentation matches the legal ownership.
- Whether the investment is permitted under the fund’s trust deed.
- Whether the investment strategy supports the purchase.
- Whether all transactions are conducted on arm’s-length terms.
- Whether the fund can meet loan repayments and expenses.
Common SMSF property traps
Buying an ineligible property
A residential property generally cannot be lived in or used by members or related parties. It cannot be purchased simply because it is expected to increase in value.
From 10 August 2026, the restrictions applying to real property held under an LRBA are even more important because the property must meet the business real property requirements.
Acquiring multiple assets under one LRBA
A single LRBA generally cannot be used to acquire multiple unrelated properties.
The ATO has also stated that multiple real property titles cannot be acquired under one LRBA unless it is reasonable to conclude that what is being acquired is a distinctly identifiable single asset.ato.gov
Making improvements that change the asset
Improvements to an LRBA asset must be carefully assessed. Trustees should avoid arrangements where borrowed funds are used to acquire one asset and then substantially change it into another asset.
Property development, subdivision and construction can create complex compliance issues.
Using related-party finance incorrectly
A loan from a related party must be properly documented and conducted on commercial, arm’s-length terms. Interest rates, repayment terms, security and loan-to-value ratios should be supportable.
Failing to maintain liquidity
Property is not a liquid asset. The SMSF must still have enough cash to pay loan repayments, tax, insurance, accounting fees, audit fees and member benefits.
Forgetting the investment strategy
The property purchase must be consistent with the SMSF’s investment strategy. The strategy should explain why the investment is appropriate, how it supports retirement objectives and how the fund will manage liquidity and risk.
Business property and SMSFs
Business owners may consider purchasing business premises through an SMSF and leasing the property to their business. This can be possible where the property qualifies as business real property and the arrangement is properly structured.
The lease should be commercially documented, rent should reflect market value and payments should be made on time. Professional advice should be obtained before signing a contract or entering into a lease.
Get advice before signing
An LRBA is not a standard business loan. A mistake in the structure, contract, holding trust or loan documents can create serious compliance and tax consequences.
Agilis CA can help business owners assess the strategy, review the proposed investment and coordinate with legal, lending and property professionals.
Considering buying business property through your SMSF? Speak with Agilis CA before signing a contract.
