Property continues to be a very popular investment among SMSF trustees, but Mark Ellem warns individuals must acknowledge the many compliance layers associated with the asset class before committing to including it in their fund’s portfolio.
SMSFs continue to hold a significant and growing slice of the nation’s property exposure. Billions of dollars of SMSF capital is invested directly in residential and commercial real estate and tens of billions more is held through limited recourse borrowing arrangements (LRBA). That popularity is understandable as property is tangible, commonly understood by clients and, for many, central to retirement strategies.
What is less appreciated is that property inside superannuation, or held via an entity in which an SMSF invests, attracts an entirely different regulatory and tax lens. Trustees and their advisers need to understand and appreciate the additional layers of rules, the limitations and the ongoing administrative obligations before they commit to an acquisition. In other words, they need to know what they’re getting themselves into so the annual requirements and questions from the SMSF auditor are expected and anticipated, not surprising.
Multiple pieces of legislation
At the heart of the issue is the overlap of multiple regimes. Superannuation law, principally the Superannuation Industry (Supervision) (SIS) Act and Regulations, imposes prohibitions on certain related‑party acquisitions, prescribes in‑house asset limits, requires adherence to the sole‑purpose test and sets out detailed rules for LRBAs and trustee covenants such as the separation of fund assets.
Income tax law adds a further overlay: non‑arm’s-length income and expenditure rules, capital gains tax (CGT) changes that are specific to superannuation funds and compliance positions that affect the fund’s tax liability and after‑tax returns (for example, the non-arm’s-length component of a fund’s taxable income). Add the goods and services tax (GST), plus the evidentiary and audit obligations SMSFs face, and it becomes clear property transactions inside or connected with super are potentially legally and administratively more complex than equivalent transactions outside the retirement savings system.
In practice, this means clients who think of property as a simple buy‑and‑hold asset need to be given a reality check: the structure that may suit a personal portfolio can be unsuitable, or heavily constrained, once superannuation law applies.
Related parties
A common trap arises when trustees contemplate acquiring property from related parties. The law broadly prohibits trustees from intentionally acquiring assets from related parties except in limited circumstances. Exceptions, such as acquiring business real property (BRP), listed securities or units in a compliant non‑geared trust or company, are tightly drafted and require acquisitions to occur at market value and to be supported by contemporaneous and appropriate valuation evidence.
Failing to obtain or retain appropriate valuation documentation, or using a figure that does not reflect market value at the time, can convert what looks like a routine transaction into one comprising non‑arm’s-length expenditure (NALE) or an arm’s‑length breach with potential significant tax consequences. Of particular importance is the fact that where non‑arm’s-length elements are found to exist, the resulting non‑arm’s-length income (NALI) can be applied to both future ordinary income and capital gains on the asset; a taint that cannot simply be undone.
Leases to related parties present a separate but equally material field of risk. An SMSF that leases property to a related party must ensure the agreement is genuinely commercial. That requires not only setting rent at market level, but documenting the terms, frequency of payment, outgoings recovery and all other clauses are the same as would be offered to an unrelated arm’s-length tenant.
Where rent is demonstrably below market, the trustee risks contravention of the arm’s‑length rules under the SIS Act. To this end, where rent is above what an arm’s-length tenant would pay, the income may be captured under the NALI provisions and taxed at the top marginal rate of 45 per cent.
SMSF trustees contemplating property must therefore be prepared to gather evidence of market-value rent and asset valuation, have a well‑drafted commercial lease prepared, conduct annual reviews of rent or include market rent review mechanisms in the lease, and ensure prompt enforcement of lease terms if breached. Trustees should also be mindful of how the existence, expiry or hold over of a related‑party lease may interact with in‑house asset rules and exemptions that rely on the existence of an arm’s-length lease agreement.
Using an LRBA
Acquiring a property via an LRBA creates another set of structural and compliance obligations. An LRBA requires the acquirable asset to be held in a bare trust with the SMSF retaining the beneficial interest and the lender’s recourse limited to the asset itself. Recent amendments to the LRBA rules, including changes that narrow what constitutes a ‘single acquirable asset’ where the asset is real property, mean trustees must be especially careful when using LRBAs for residential acquisitions.
If the LRBA involves a related‑party lender, the SMSF trustee must ensure the terms of the loan are at arm’s length. Trustees can apply the ATO’s safe‑harbour terms or use careful benchmarking of comparable commercial loans, but in practice obtaining objective evidence that replicates the loan terms available in the marketplace is harder than many assume.
When an LRBA or related‑party loan falls short of arm’s‑length standards, the consequences can be severe: interest rates set too low or repayment terms that would not be granted by a commercial lender can produce NALE and convert much or all of the property income, and future capital gains, into NALI.
Tenants in common
Tenants‑in‑common arrangements where an SMSF co‑owns property with a related party are permissible, but can add additional compliance risk and administrative duties. Where the property is not BRP, the SMSF is prohibited from increasing its ownership interest. Further, care must be taken where the related party borrows to ensure a charge is not placed over the SMSF’s interest in the property.
In addition, such an arrangement is a tax law partnership and attracts partnership Australian business number and GST registration, and partnership return obligations in certain circumstances. For example, property owned as tenants in common between an SMSF and related party would require an SMSF member to lodge a separate partnership return (refer to Legislative Instrument 2026/16 in respect of the 2026 income year).
Interposed entity
Care also needs to be taken where the SMSF holds property via an interposed entity. Where the interposed entity is structured as a non‑geared unit trust that satisfies Division 13.3A of the SIS Regulations, the trust can be excluded from being an in‑house asset and this path can permit the SMSF to increase an indirect interest in non-BRP property over time.
However, events can occur that will forever taint the non-geared unit trust, commonly referred to as a ‘13.22D event’, which potentially requires the SMSF to dispose of its investment in the now tainted non-geared unit trust.
An SMSF’s investment in a unit trust that does not satisfy the requirements of SIS Regulation Division 13.3A has the potential to be treated as in‑house assets and count towards the related 5 per cent total asset limit, unless the trust is carefully structured to avoid control or entitlement tests that would see it meet the related‑trust definition. Such tests not only apply at the time of the SMSF making the investment in the unit trust, but also on an ongoing basis, particularly at each 30 June.
Tax and GST
Tax and GST overlays may compound the complexity. SMSFs are subject to particular CGT rules and accessible concessions: they can obtain a one‑third CGT discount for assets held for at least 12 months, but they also face items such as the market‑value substitution rule, where assets acquired below market value are treated as if purchased at market value for capital gain purposes. Importantly, those CGT adjustments do not protect against NALI. A capital gain on a tainted asset can be captured as NALI.
Trustees should also consider the implications of Division 296, which from 1 July 2026 imposes additional tax on attributed fund earnings for members with large total superannuation balances. Trustees can elect to set a CGT cost base for all fund capital assets held at 30 June 2026 for Division 296 calculations. That election is irrevocable and applies to all fund assets held at 30 June 2026 , so the advice to the client must be tailored and well documented.
GST adds another layer of exposure, particularly where property development or the sale of vacant land is contemplated. The Administrative Appeals Tribunal decision regarding the Collins Retirement Fund reinforced where an SMSF has progressed substantive development activity, obtaining approvals, engaging contractors and actively marketing lots, the sale proceeds are likely to be part of the fund’s projected GST turnover and therefore can force registration for the tax. Once registered, the fund must apply GST on taxable supplies, may need to account for reduced input tax credits and can be exposed to GST‑at‑settlement obligations and adjustment events if registration later ceases. These rules mean advisers must test projected turnover carefully and maintain contemporaneous project documentation. Where the facts are borderline, specialist GST advice is prudent.
Conclusion
All of the above translates into a sustained administration and evidentiary burden for SMSFs that hold property. Trustees must keep complete records, including independent valuations, legal documentation for leases and LRBAs, loan benchmarking evidence, bank account and cash-flow records for trusts and joint arrangements, and full audit support.
They must plan for exit events. A sensible unit trust or tenancy structure plan will include mechanisms for when one of the original unitholders wants out, for example, a one out, all out option, or third‑party transfer pathways so that a change in membership, marriage breakdown, illness or death does not trigger an immediate compliance crisis.
Trustees also need to budget for ongoing costs such as valuations and legal fees and for the higher interest or lender fees that often apply to LRBAs. Advisers should insist on expert input early in the life of a transaction, legal counsel to confirm title and trust deed implications, independent valuers to support related‑party pricing, quantity surveyors for capital works and depreciation claims, and GST specialists for development and sales.
Given the additional regulatory and administrative load, advisers may wish to consider requiring trustees to acknowledge they understand the consequences of investing in property through an SMSF or via an interposed entity. That is, they understand property held under an SMSF comes with additional layers of rules, regulations, restrictions, limitations and administrative duties and costs, both at the time of acquisition and on an ongoing basis.
Property can be an excellent component of an SMSF portfolio. However, trustees must go into property investments with their eyes open. The rules that apply to property inside super, and to entities in which an SMSF invests, are more demanding than those applying to personal investing. Advisers should be candid about the extra cost, the ongoing administration and the evidentiary standards required. Planning, robust documentation and early specialist input can turn what could be a high‑risk proposition into a well‑managed strategy.
