Guide to setting up SMSF for property investment

What should you know before investing in property through an SMSF?

Investing in property through an SMSF involves more complex rules, tax considerations and risks than investing personally. Before you start, consider these key factors:

• Regulatory complexity: SMSFs are subject to strict super and tax rules, and trustees must stay informed to avoid penalties.
• Tax implications: SMSFs may offer tax benefits, but the tax treatment of property in a super fund depends on your fund’s circumstances.
• Liquidity: Property in an SMSF can be harder to sell than other assets, and selling may take time and incur costs.
• Risk tolerance: Property values can fall, and a fund that holds a single property has less diversification.

For a detailed look at these factors, read our guide to the pros and cons of buying property with an SMSF.

What are the SMSF rules when buying property?

The main SMSF property rules require the property to be held only to provide retirement benefits to fund members, known as the sole purpose test. This test is set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The property must be bought and leased at market value, and the purchase must fit the fund’s written investment strategy.

Further rules depend on the type of property. Residential property cannot be bought from, lived in or rented by fund members or their related parties. Commercial property that qualifies as business real property, meaning it is used wholly and exclusively in a business, has some exceptions under super rules.

Read our guide to adding commercial property to your SMSF portfolio for more on commercial property purchase. 

How do you set up an SMSF to buy property?

Setting up an SMSF to buy property typically involves five steps, completed in order before you apply for a loan. We recommend seeking professional advice from a financial adviser, lawyer or accountant who specialises in SMSFs.

1. Establish your SMSF

Your fund needs to be set up correctly and comply with all regulatory requirements. This typically involves:

• Appointing a corporate trustee, as lenders typically require a company to act as trustee.
• Preparing a trust deed that allows the fund to borrow.
• Having each trustee or director sign the ATO trustee declaration.
• Registering the fund with the ATO and obtaining an Australian Business Number (ABN).
• Opening a bank account in the fund’s name, separate from the members’ personal accounts.

2. Fund your SMSF

Transfer contributions or rollovers into your SMSF so it can meet the deposit and purchase costs. The fund typically needs a deposit of at least 20%, plus funds for stamp duty, legal fees and a cash reserve.

3. Set up a bare trust

If your fund will borrow, a separate company must be set up to act as trustee of a bare trust, which holds the property title until the loan is repaid. The bare trust must be in place before the purchase contract is signed, and the contract should name the bare trust company as the purchaser. If the contract is signed in the wrong name, the purchase may not qualify as a limited recourse borrowing arrangement (LRBA). LRBAs are permitted under section 67A of the SIS Act, and the ATO explains how they apply in SMSFR 2012/1.

4. Secure pre-approval

Obtain pre-approval for your SMSF loan to understand how much your fund may borrow before you start your property search.

5. Research properties

Identify properties that fit your fund’s investment strategy and meet your lender’s requirements. With the borrowing changes, any property your fund borrows to buy must be commercial property.

Our how to buy a property with an SMSF guide explains how these loans work and what lenders look for.

How can Yard help with SMSF loans?

Yard is a specialist non-bank lender offering SMSF loans for commercial property, for both purchases and refinances. Yard can also refinance an existing residential SMSF loan that was in place before the borrowing changes. A dedicated Yard Loan Consultant guides you from your first enquiry through to settlement.

The application follows three steps:

1. Book a call with a Yard Loan Consultant, who will guide you through the application process.
2. Provide your documents, and your consultant will confirm what is needed for your fund.
3. Receive a decision. Once approved, Yard prepares your loan documents and arranges settlement.

You can estimate repayments with our SMSF loan repayment calculator before you apply. All loans are subject to Yard’s credit criteria.

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Author: Luke Harris, General Manager at Yard.
Luke has more than 15 years of experience across institutional banking, liquidity management and financial markets, including senior leadership roles at Westpac Institutional Bank. He holds a Bachelor of Economics (Economics and Finance) from the University of Sydney, and his expertise covers credit availability, interest rate and funding conditions, and the regulatory environment that affects borrowers.}