What You Can and Can’t Do with SMSF Borrowing

SMSF Borrowing

Borrowing to invest in property has long been a very popular way for Australians to create wealth and it’s no different for a Self-Managed Super Fund (SMSF). Property is seen as a safe and efficient asset to invest in and historically it has performed very well.

Follow along as we take a look at what you can and can’t do when borrowing for property in an SMSF structure.

First of all, we’ll assume you have an SMSF already set up and understand the obligations and responsibilities you have as the Trustee. In addition, prior to committing to a purchase, we strongly recommend discussing it with your SMSF qualified Financial Planner.

Initially, it looks to be quite easy identifying what you can and can’t do. The rules say you are allowed to buy a single acquirable asset so obviously you can buy a house or a unit or an apartment for example.  Suffice to say that if the property you are looking to buy has a Single Contract of Sale you should be ok.

Over the last few years, purchasing a property asset using a limited recourse borrowing arrangement (LRBA) has become increasingly popular with SMSF trustees. The ability to gear or leverage an SMSF increases the wealth creating capabilities of the fund but you can only borrow money to purchase a single acquirable asset within an SMSF by using a LRBA. By entering into an LRBA, any recourse the lender has under the borrowing arrangement is limited to the single asset purchased using the LRBA. Of course, it goes without saying that Lenders will require personal guarantees from the directors of a Corporate Trust.

It’s probably worth pointing out that an SMSF can purchase property using its own accumulated funds. It doesn’t have to borrow. It can carry out repairs and maintenance on the property, improve the property through renovations and even change the asset into something else entirely. For example it could purchase a house and replace it with three units on the same block. As long as all of this is conducted using the SMSFs own money there is no issue.

However, introducing an LRBA into the mix changes the situation completely because the LRBA has specific rules around what it can and can’t do. At its most basic level the LRBA changes the type of asset that an SMSF can acquire and limits the scope of alterations to the property as well. Indeed, some repairs or maintenance issues could provide an opportunity to renovate which may inadvertently change the asset sufficiently for it to be seen to be a different asset.

Repair and maintenance as opposed to Improving

During ownership it may become necessary to make some repairs to the asset and this raises some questions about what is a repair and what is an improvement.

There is some confusion surrounding these terms so the ATO has issued 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.”

Improvements that change the character of the investment are clearly to be avoided

We thought a small, but not exhaustive, list of what you can and can’t do would be helpful.

  • You can buy a single acquirable asset like a house, unit or apartment.
  • You can repair or maintain the asset using borrowed funds in certain circumstances.
  • Your ability to borrow will ultimately depend on the lender.
  • You can buy an OTP property under certain circumstances.
  • You can buy a house and land package under certain circumstances.
  • You cannot buy land then build a house later.
  • You cannot buy a house, demolish it and put up some units.
  • You cannot buy multiple assets.

An existing property may have maintenance or repair requirements that are needed sooner than you anticipated. Perhaps a simple way of avoiding these issue is to purchase a new home which will have minimal requirements for repair and maintenance for some time to come.

Why not make an appointment to talk to one of our Property Advisers today about your SMSF property purchase needs.


1300 663 836

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Investors Direct Financial Group

Investors Direct Financial Group (IDFG) was established in 2001.
Our mission is to help our clients achieve and maintain their financial freedom.

Members of the IDFG Group include:
  • Nanmon Financial Services Pty Ltd, trading as Investors Direct Financial Group (ABN: 52 097 697 820 ; ACL: 402950)
  • ID Property Advisory Pty Ltd (ABN: 69 141 716 412 ; Real Estate Licence: 071792L)
  • Investors Direct Financial Planning Pty Ltd(ABN: 50 141 139 228 ; AFSL: 385827)
  • 8 Star Homes Pty Ltd (ABN: 83 135 066 876)