SMSF borrowing: Investing in property (what’s OK and NOT OK)

If you run a self-managed superannuation fund, you can invest in all types of real property, including residential property, commercial property, industrial property and even a farm (under certain circumstances).

Before September 2007, the capacity to use borrowed money to purchase an SMSF asset, such as real property, was extremely limited. In September 2007, the rules relating to borrowing within a self-managed super fund were relaxed, although the specific type of borrowing arrangement now permitted within SMSFs is still subject to strict requirements. The borrowing rules were further finetuned in July 2010.

Apart from two exceptions covering short-term cash flow issues within an SMSF, you can only borrow money to purchase an asset within an SMSF by using a limited recourse borrowing arrangement (LRBA). A LRBA means that any recourse the lender has under the borrowing arrangement is limited to the single asset purchased using the LRBA.

Purchasing an asset using a limited recourse borrowing arrangement  (LRBA) is becoming increasingly popular with SMSF trustees seeking to gear an investment portfolio without breaking super’s ‘no borrowing’ rules.

On 14 September 2011, the ATO released a draft SMSF ruling clarifying the rules applying to limited recourse borrowing arrangements, and in May 2012, a final ruling was published: SMSFR 2012/1, “Self-managed superannuation funds: limited recourse borrowing arrangements – application of key concepts.”

The final ruling (as did the draft ruling) deals mainly with real estate and SMSF borrowing. The good news for many SMSF investors is that the ATO’s interpretation of what SMSF trustees can do to maintain properties subject to a LRBA provides greater investment opportunities. For example, the ATO has clarified that it is possible to borrow via a LRBA and invest in an older investment property, and to renovate (but not ‘improve’) this property using borrowed money under the existing LRBA, under certain circumstances.

The ATO has also clarified that it is possible to ‘improve’ a property which was purchased using a LRBA, provided that the SMSF trustees do not use borrowed funds to finance the renovation.

SMSF borrowing rules

Although most of this article covers what the super rules permit you to do as an SMSF trustee, you also need to consider whether borrowing to invest is an appropriate investment consideration taking into account the risk and return of the underlying investment and the risk profile of the fund members, the cash flow considerations for the SMSF and whether the super fund is sufficiently diversified to meet its long-term investment objectives.

When a SMSF uses an LRBA to purchase an asset, then the arrangement must satisfy the following conditions:

  • The SMSF uses the borrowed monies to purchase a single asset, or a collection of identical assets (such as a parcel of identical shares) that have the same market value.
  • The SMSF can’t use the LRBA monies to ‘improve’ a purchased asset, although the borrowed money can be used to ‘repair’ or ‘maintain’ an asset. The practical implications of this distinction are explained later in the article.
  • The SMSF trustees receive the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust (the holding trust).
  • The SMSF trustees have the right to acquire the legal ownership of the asset by making one or more payments.
  • Any recourse that the lender has under the LRBA against the SMSF trustees is limited to the single fund asset (including rights to income). Lenders can legally demand an individual to provide a personal guarantee as long as the guarantor’s rights against the principal debtor (as SMSF trustee) are limited to rights relating to the asset acquired under the LRBA. What this means is that the lender has a right to call on the personal guarantor for any shortfall after disposal of the original asset.
  • Replacing the asset subject to the LRBA is possible only in very specific circumstances.

The ATO has provided further detail on what some of the conditions listed above mean in the ATO’s SMSF Ruling 2012/1 in particular, the meaning of the following terms:

  • a ‘single acquirable asset’
  • maintaining or repairing (which is OK to use borrowed money from the existing LRBA)
  • improving (which is not OK to use borrowed money from the existing LRBA, but can still renovate using other SMSF savings)
  • a replacement asset (negates the existing LRBA, except in limited circumstances)

The ATO has given meanings to the following words:

  • ‘Maintaining’: ordinarily means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration, provided that the work merely ensures the continued functioning of the asset in its present state.
  • ‘Repairing’: Ordinarily means remedying or making good defects in, damage to, or deterioration of an asset and contemplates the continued existence of the asset. A repair is usually occasional and partial, restoring the function of the asset without changing its character. ‘Repairing’ may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated through ordinary wear and tear, or is damaged whether accidentally or deliberately by natural causes.
  • ‘Improving’: Significantly altering the state or function of the asset for the better. According to the ruling, “In contrast to repair, an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset…Determining if an acquirable asset is merely restored, or whether its state or function is significantly altered for the better, is a question of fact and degree. In each case it is necessary to consider the qualities and characteristics of the acquirable asset that is subject to the LRBA at the time the LRBA was entered into. Whether the state or function of the acquirable asset has altered significantly for the better is determined objectively and without reference to the actual use to which the acquirable asset is put. Alterations will not amount to an improvement if the state or function of the acquirable asset is only bettered to a minor or trifling extent as compared to the asset as a whole.”

You can read the ruling at your leisure by clicking on the link in the next paragraph. As a quick reference however, after the next section of this article, you can find a comprehensive list of many of the property investing scenarios that the ATO says are OK when using an LRBA, and the scenarios that are NOT OK when using an LRBA.

Note: The ruling, SMSFR 2012/1, applies to arrangements entered into on or after 7 July 2010 (including any arrangement that involves a refinancing since 7 July 2010).

Do different rules apply for SMSF borrowing from related parties?

Important: If you have used a related-party lender or non-bank lender to arrange an LRBA, then you need to read this section, and take note of the changes to the rules that were announced in April 2016 (deadline for making specific changes has been extended to 31 January 2017). If your LRBA, or proposed LRBA, is with a commercial lender, then skip this section, and scroll down to the section outlining the investment scenarios that are OK and NOT OK.

Since the SMSF borrowing rules were first introduced in 2007, and then finetuned in 2010, different methods of financing such loans have evolved.

In 2010, the ATO released an interpretative decision (ATO ID 2010/162) stating that SMSF trustees would not breach the borrowing rules if a related party lent money to a SMSF under a LRBA on lending terms that were more favourable to the SMSF than an arm’s-length finance provider. Conversely, note that the loan would breach the SMSF borrowing rules if the terms of the loan were more favourable to the related party lending the money, than would have been the case if both parties had been dealing at arm’s length.

Some SMSFs have applied this interpretative decision to extreme scenarios where the related party charges nil interest, and also has very high loan valuation ratios, up to 100%. Based on ATO ID 2010/162, this scenario would be okay because the lending terms are very favourable to the SMSF (compared with an arm’s length lender) but not more favourable to the related party lending the money.

In the more extreme circumstances, such as nil interest being charged, and/or very high loan valuation ratios, the ATO has warned that the favourable terms could mean any income derived from the arrangement could be treated as ‘non-arm’s length income’ and taxed at 47% (rather than 15% in accumulation phase, or nil in pension phase).

In April 2016, the ATO released Practical Compliance Guidelines PCG 2016/5, which explain the rules that are applicable to an LRBA financed by a related party. For any LRBA that has terms that are not consistent with an arm’s length dealing, then the income generated by that asset may be treated as non-arm’s length income (NALI), and subject to much higher tax (47%).

According to PCG 2016/5, the ATO will accept that an LRBA is structured in accordance with the guidelines, if the terms of the LRBA are consistent with an arm’s length dealing, and that NALI provisions do not apply purely because of the terms of the borrowing arrangement, or the existence of related parties.

For details on what the ATO requires for an LRBA financed by a related party, see SuperGuide article SMSF borrowing: Fix related party LRBAs by 31 January 2017, or risk 47% tax.

SMSF investment scenarios: what’s OK and NOT OK?

The following scenarios outline when an existing LRBA will continue to apply to an asset, based on the ATO’s SMSF ruling (SMSFR 2012/1). For example, if a repair is completed on an asset that is subject to an LRBA, that arrangement has not changed simply because a repair has been completed, which means the existing LRBA can continue to be in place (and borrowed moneys from that LRBA can be used to complete the repair).

Note: If the deterioration of an asset occurred before the asset was acquired under an LRBA, and that asset is then repaired using borrowings under the LRBA, the use of those borrowings to repair the asset is OK. The ATO notes however, the greater the state of deterioration at the time of purchase, the greater the chance that any alterations will be regarded as improvements and needed to be funded using SMSF cash, rather than borrowed money under the LRBA. Paragraph 30 of SMSFR 2012/1 states: “Subparagraph 67A(1)(a)(i) provides that borrowings under an LRBA cannot be used to fund improvements. However, money from other sources can be used to improve (or repair or maintain) a single acquirable asset. For example, accumulated funds held by the SMSF may be used to fund the improvements. However, any improvements must not result in the acquirable asset becoming a different asset.”

Key point: If SMSF trustees do decide to improve an asset subject to the LRBA, then the SMSF trustees must use other SMSF cash to do so, and also must ensure that such an improvement doesn’t change the character of the underlying asset.

1. Repair and maintenance (OK) vs improvement (NOT OK)

ProjectRepair or maintenance (OK under LRBA)Improvement (NOT OK under LRBA)*
Residential property
Fire damage to kitchen (cooktop, benches, walls and ceiling)Restore damaged part of kitchen, including adding a dishwasher, even if there wasn’t one there beforeAdded an extension to the kitchen as part of the restoration, or added an external kitchen
Replace guttering (including add leafguard)OK
Paint houseOK
Replace fence (including add gate)OK
Install fire alarm (due to council requirements)OK
Install a home automation system , including audiovisual, lighting and security systemNOT OK
Install a swimming poolNOT OK
Cyclone damage to roofReplace roofAdd a second storey at the same time as replacing roof
Build a pergolaNOT OK
Add a second bathroomNOT OK
Replace house destroyed by fireRebuild comparable houseRebuild house not comparable (although if built from insurance proceeds rather than borrowings, does not affect LRBA)
Farm property
Farm on single title with cattleyards and 4 bores and fencingReplacing a section of the cattleyards or fencingAdditional cattleyards (NOT OK)

Additional bores (NOT OK)

Additional bores or dam (NOT OK)

Additional shed (NOT OK)

Additional fencing (NOT OK)

Machinery & equipment
Earth-moving equipmentImmediately after purchase, part of the LRBA money is used to repair the hydraulics system (OK)A major overhaul of the asset, including replacing all key parts (NOT OK)

Source: Created from information contained in SMSFR 2012/1 (  The copyright of table and contents belongs to Trish Power.

*But a SMSF can use SMSF cash, rather than borrowings from the LRBA, to fund improvements.

2. Retain asset identity (OK) vs Becomes different asset (NOT OK)

ProjectRetain identity of existing asset (OK under LRBA)Becomes different asset (NOT OK under existing LRBA)
Vacant block of land on single titleSubdivided land resulting in multiple titles
Vacant block of land on single titleA residential house is built on that vacant land (even though remains single title) which fundamentally changes character of asset.
A house and landHouse is demolished following fire and replaced by three strata units.
A house and landConversion of house into restaurant, with commercial kitchen.
A house and landOne bedroom converted into home office
Four bedroom house and landFire destroys the house and rebuild house with insurance proceeds and SMSF cash, even when add a garage that was not there before
A house and landThe following changes are improvements (so couldn’t finance them via the LRBA) but do not change the character of the asset (so would not make the existing LRBA void):

  • Extension adding 2 bedrooms
  • Addition of swimming pool
  • Addition of garage, shed and driveway
  • Addition of garden shed
A house and landCompulsory acquisition of part of front yard for road widening
A house and landAdding a granny flat does not change the character of the property (although the building costs for the granny flat could not be financed via the LRBA).

Source: Created from information contained in SMSFR 2012/1 (  The copyright of table and contents belongs to Trish Power.

3. Single asset (OK) vs Multiple assets (NOT OK)

ProjectSingle asset (OK under LRBA)Multiple assets (NOT OK under single LRBA)
Two adjacent blocks of landVendor will only sell two blocks together but on separate titles and no legal impediment to being sold separately (NOT OK)
Factory complex on more than one titleEntire factory covers three separate titles so cannot be sold separately..
Farmland with multiple titlesSingle business but on two titles and no legal or physical impediment to selling titles separately (NOT OK)
Completed ‘off the plan’ apartmentPaid deposit in cash, and can enter LRBA to pay the balance.
Vacant block of land, and later decide to build a houseBuilding a house on land involves more than one asset (NOT OK)
House and land PackageOK
Apartment with separate car parkAlthough on separate titles, local council does not permit separate sale so single asset.
Serviced apartment and furnishingsRequirement to also purchase a furnishing package is a separate asset. Apartment is a single asset and furnishings are another asset (NOT OK)
Option to purchase a houseOK, if just the optionNOT OK, if subsequently purchases the house because the option is a different asset to the house

Source: Created from information contained in SMSFR 2012/1 (  The copyright of table and contents belong to Trish Power.

For more information on SMSFs and property, or SMSF borrowing, check out the following SuperGuide articles:

For more information, check out the following ATO material:


  1. Can anyone provide the name of a lender willing to lend on farm property (land only) through SMSFs using an LRBA?

  2. Hi,
    Can my SMSF buy a block of land and I’ll buy house on it.
    It would be investment house and I guess shared between SMSF and me in the ratio money invested.

    • Peter (Niche Accounting Solutions) says:

      First up depends wether house is already on the land when you buy it

      Not sure what state you are in but in Victoria your contract is for the land and anything attached to it – so you cant “split” the contract between house and land portions.

      Buying would therefore be “tennants in common” and would be % SMSF and % you – you have talk to your accountant first about structure to make sure you can meet the compliance requirements.

      If you are looking at vacant land and borrowing for land in SMSF and you then pay to build subsequent it is the same as the second example in “2. Retain asset identity (OK) vs Becomes different asset (NOT OK)” as a no under LRBA so fund cant borrow with out trustee breach.

      This question is a regular one so dont be afraid to have your accountant / financial adviser go through the options with you




    I please need cash for subdivide and legals to sell some property to own the rest but Q-super wont help if you can assist in anyway then please email me urgent and I will swap funds, the money from super is included in the remaining small mortgage to go straight back into the super fund, its my money I need short term unrestricted money, will sign to comit the put back within 1 month,
    regards Reenee

  4. Fred van Urk says:


    I sell House and Land Packages (new homes under construction) over in South WA. I have a client that wants to use his SMSF to purchase but we are unsure if he can enter a construction loan which is required for the house build. He will need to borrow as well so that’s why this article is of interest.

    Has anybody had experience in this matter at all?

    Any help or guidance would be greatly appreciated.

    Kind Regards

  5. Jennifer says:


    Just wondering if someone please help me with a question regarding SMSF.

    The Trustee wishes to purchase an investment property but is a little short of funds. Rather than borrowing from a bank which would involve setting up a LRBA, can the SMSF borrow from its members (with or without interest)?

    Thank you so much.


  6. K Highman says:

    Hi Trish, we are fortunate to know a developer who buys land that has existing elevated homes on the land. He has advised us if we pay to remove the house & clear the site the house is ours to do what we like with.

    We are thinking of paying for the removal of the house ($60K) from our self managed super fund and then selling only the house on for a profit. Is this allowable under a SMSF?

  7. Hi, Can you buy block of unit on SMSF and then strata title? Thanks.

  8. Hi im curious about smsf ive been checking out info regarding property investing,and i dont seem to be able to find the particular answer im looking for.Every site i go to seems to emphasise on the LRBA however i dont want to buy a house as such or buy vacant land to build on im not interested in borrowing.What i want is to only utilise what i have in my super to buy a vacant block of land in areas that are sought after.Keep it for a year or two then sell it at a profit,and continue with this trend over the years to build up my nest egg.Can you please enlighten me regarding my intention.Ive spoken to a couple of friends enquiring if whether they would be interested in coming on board with me as i anticipate the more money thats in the trust,the more we could afford to buy.should i go it alone or have others include in this idea of mine.Any info would be greatly appreciated.

  9. Really informative, thanks.

  10. Bradley Carr says:

    Can I purchase a property in another country as my SMSF investment ?
    The amount in my current fund is more than sufficient to pay for the investment outright.
    As I am employed outside of Australia, can I live in the investment property of said country, or do I have the rent it out ?

  11. Trish,
    Your website and Superguide Newsletter are the best around, they provide true clarity.
    One item I would like to know, is it possible for a SMSF to own a portion of a house (as tenants in common)? Thanks… Barry

  12. D&M Thompson says:

    Information, advice , and rules, are lacking on SMSFwhen closed and in pension mode . A simple booklet on closed SMSF in pension mode, rules laws advice etc would be much apreaciated .Not mixed in with all the other SMSF rules and info . Thank you .

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