SMSF and Property: What Your Fund Can and Cannot Do

Self-managed superannuation funds represent one of the largest pools of investable capital in the Australian economy, with ATO data showing more than $900 billion in assets held across approximately 620,000 funds as at the December 2024 quarter. Property is among the most common SMSF investment categories. But the rules governing SMSF property investment are precise, the penalties for non-compliance are severe, and the misunderstanding of those rules — particularly around related party transactions and the sole purpose test — is widespread.

This guide sets out the current position under the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and ATO guidance as at 2026. It is general information only. SMSF investment decisions must be made in accordance with the fund's investment strategy and documented appropriately, and specific advice from a licensed financial adviser and SMSF specialist is required before any property purchase is made through an SMSF.

What an SMSF Can Invest In: The Basic Rule

An SMSF may invest in residential property, commercial property, or both. There is no prohibition on property investment as an asset class. The restrictions are not on the type of property itself but on the relationship between the property, the fund, and the fund's members — and on the purpose for which the investment is made.

The overarching rule is the sole purpose test in section 62 of the SIS Act. An SMSF must be maintained solely for the purpose of providing retirement benefits (or death benefits) to its members. An investment that also serves a personal or recreational purpose for a member — directly or indirectly — fails the sole purpose test, regardless of whether it is profitable.

Residential Property: The Key Restrictions

An SMSF can purchase residential investment property, provided the following conditions are met:

• No member or related party can occupy the property. A trustee of the fund, a member of the fund, or a related party of any member cannot live in a residential property owned by the fund — even temporarily, even at market rent. This applies to the principal place of residence, a holiday home, or any other form of personal use
• No member or related party can rent the property. A residential property owned by an SMSF cannot be rented to a related party. A related party includes the member's relatives (spouse, children, parents, siblings) and entities controlled by any of these people
• The property cannot be acquired from a related party. An SMSF cannot purchase a residential property that is currently owned by a member or a related party of a member, regardless of the price paid

These restrictions apply to residential property specifically. They do not apply in the same way to commercial property, as explained below.

Commercial Property: A Different Framework

Commercial property held by an SMSF operates under a different set of rules. Specifically:

• An SMSF can purchase commercial property from a related party, provided the transaction is made at arm's length and at market value (assessed by an independent valuer)
• An SMSF can lease commercial property to a related party, provided the lease is at market rent and on standard commercial terms
• A business owner who is also an SMSF member can therefore have their SMSF purchase the business premises, with the business (a related party) paying commercial rent back to the fund

This is a common and legitimate SMSF structure for small business owners. The property must be genuinely commercial in nature, the valuation must be independent, and the lease must be documented at market terms. ATO guidance on arm's length dealings and related party transactions should be consulted and the transaction documented carefully.

The Sole Purpose Test in Practice

The sole purpose test catches arrangements that are technically compliant on paper but are structured in a way that delivers a collateral benefit to a member or related party. The ATO has published a range of private binding rulings and interpretive decisions on what constitutes a collateral benefit.

Common fact patterns that attract ATO scrutiny include:

• A holiday property purchased by an SMSF in a location where members regularly holiday, even if the property is listed for short-term rental when not in use by the fund's tenants
• A commercial property leased to a related-party business at below-market rent, even if this is framed as a commercial transaction
• A development project in which a member or related-party builder is engaged as the principal contractor, generating income for the related party from the SMSF's funds
• A property purchased through the SMSF at a price above its market value from a third party, where the seller has a relationship with a member

Penalties for sole purpose test breaches are significant. The ATO can make the fund non-complying, which results in the fund's assets being taxed at the highest marginal rate rather than the concessional 15% rate applicable to complying funds. This can effectively destroy a large portion of the fund's retirement savings.

Limited Recourse Borrowing Arrangements

An SMSF is generally prohibited from borrowing money. The exception is a Limited Recourse Borrowing Arrangement (LRBA) under section 67A of the SIS Act, which permits an SMSF to borrow to acquire a single asset held in a separate bare trust until the loan is fully repaid.

Important change — now law: The Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 passed both houses of Parliament on 25 June 2026. It includes an amendment, secured by the Australian Greens as the price of Senate support, that bans SMSFs from entering new LRBAs for residential property. The ban takes effect approximately 45 days after Royal Assent — expected around mid-August 2026. Existing residential LRBAs entered before the commencement date are fully grandfathered and unaffected. LRBAs for commercial real property remain available. SMSF trustees planning a new leveraged residential property acquisition face a narrow window and should seek urgent advice from an SMSF specialist before committing to any arrangement.

The following information describes the LRBA rules as they apply to existing arrangements and to commercial property, both of which remain fully operative.

Key features of LRBAs:

• The lender's recourse is limited to the asset held in the bare trust. If the fund defaults on the LRBA, the lender can only recover the asset being funded — not other assets of the fund
• The asset must be held in a bare trust (sometimes called a holding trust) for the duration of the loan. The SMSF acquires the beneficial interest in the asset immediately, but legal title does not transfer until the loan is fully repaid
• The borrowed funds can only be used to acquire the specific asset — not for improvements, renovations, or the replacement of the asset
• The LRBA must be at arm's length if the lender is a related party (for example, if a member lends to the fund directly). The ATO publishes safe harbour interest rates and terms for related-party LRBAs

ATO data shows that SMSF assets held under LRBAs exceeded $75 billion as at December 2025, indicating the scale of this structure in the Australian superannuation landscape.

LRBAs are a legitimate and widely used structure, but they are complex and must be properly documented. The bare trust deed, the loan agreement, and the SMSF's investment strategy must all be consistent and correctly drafted. Errors in documentation — particularly in the bare trust structure — can result in the ATO disregarding the arrangement and treating the borrowing as non-compliant.

What an SMSF Cannot Do

The following are prohibited under the SIS Act regardless of how they are structured:

• Acquiring a residential property from a related party (section 66 — in-house asset rules)
• Allowing any member or related party to occupy a residential property owned by the fund
• Using borrowed funds under an LRBA to improve or replace the acquired asset (only acquisition is permitted)
• Holding more than 5% of the fund's assets as in-house assets — assets that are a loan to, an investment in, or a lease to a related party (the residential property commercial lease exception applies, but only if the commercial property is not an in-house asset)
• Providing financial assistance to members or their relatives using the fund's assets

Off-the-Plan Purchases Through an SMSF

An SMSF can purchase an off-the-plan property, but the structure requires care. The SMSF pays the deposit on exchange, and the property settles on completion. Standard LRBA rules apply if the purchase is funded with borrowing.

One complication specific to off-the-plan is the gap between exchange and settlement — which may be 12 to 36 months for large developments. The SMSF's liquidity position must be sufficient to meet any calls during the construction period, and the LRBA lender's conditions (including any construction completion requirements) must be confirmed before exchange. Some lenders will not issue unconditional LRBA finance until construction is complete and a final inspection certificate is issued.

FIRB approval is required if the SMSF has a foreign person as a member or is foreign-controlled. A fund with an Australian citizen trustee-member who is purchasing a new dwelling is not a foreign person and does not require FIRB approval. A fund that is partially or wholly foreign-controlled should seek specific advice on FIRB status before proceeding.

Key Government Sources

• ATO — Self-managed super funds — ato.gov.au/smsf
• ATO — Sole purpose test — ato.gov.au (search: sole purpose test SMSF)
• ATO — Limited recourse borrowing arrangements — ato.gov.au (search: LRBA SMSF)
• ATO — In-house assets — ato.gov.au (search: in-house assets SMSF)
• Superannuation Industry (Supervision) Act 1993 (Cth) — legislation.gov.au
• ASIC MoneySmart — SMSF — moneysmart.gov.au