SMSF Property Investment

A Self-Managed Super Fund can purchase investment property under two scenarios: direct purchase (if the fund has enough cash/assets) or via a Limited Recourse Borrowing Arrangement (LRBA). An LRBA allows the SMSF to borrow to purchase a single asset — typically residential or commercial property — with the lender's recourse limited to that asset only (hence 'limited recourse'). The tax advantages are compelling: rental income earned inside the fund is taxed at 15% (in accumulation phase) or 0% (in pension phase if members are drawing a pension). Capital gains on assets held more than 12 months are taxed at 10% in accumulation, or 0% in pension phase. Compare this to holding property personally at 47% marginal rate — the difference in after-tax returns is enormous over 10+ years. For a property generating $40,000 in annual rent: personally taxed at 47% = $18,800 tax. Inside SMSF at 15% = $6,000 tax. Annual saving: $12,800. Over 15 years (ignoring growth), the compounding of that extra $12,800/year inside the fund is substantial.

SMSF property comes with strict rules. The property must meet the 'sole purpose test' — it must be held for the purpose of providing retirement benefits, not for personal use or benefit. You cannot live in or holiday in a residential investment property owned by your SMSF. You cannot rent it to related parties (family members). Commercial property is different: you CAN lease a commercial property from your SMSF, provided it's at market rent. This is a popular strategy for business owners — buy your business premises through your SMSF, then pay market rent to yourself (the SMSF). The rent is deductible for your business, and the rental income and capital growth are taxed at the super rate. LRBA borrowing rates are typically higher than personal investment loans (currently 7–8% for most lenders), and lenders require a higher deposit (30–35%). Setup costs are also significant: SMSF establishment ($1,500–$3,000), bare trust establishment ($1,500), legal fees, and ongoing audit costs ($1,000–$2,500/year). You need a sufficiently large fund balance to make the economics work — most advisers suggest $200,000+ before considering property.