Investing with a Self-Managed Super Fund (SMSF)

On 1 July 2025, the superannuation guarantee rate increased to 12% of every Australian worker’s wage. In October 2025, Australian superannuation account balances reached a record high of $172,834 on average. The total superannuation held by Australians in October was estimated at $4.3 trillion.

With the increasing superannuation guarantee rate, more and more money is being held in superannuation, and clients are asking the question: 'Should I take control of my super by setting up a self-managed super fund to buy property?'

For years, this has been one of the most aggressively marketed retirement strategies in Australia. The idea is that ordinary Australians can supercharge their retirement by leveraging into residential property through an SMSF, and the pitch is seductive. With news stories of average home value increases and increased rental returns, the residential property market is seen to have delivered exceptional returns over the past ten years.

While the concept sounds great, very few clients, and even their advisers, understand what the legal requirements and dangers are of investing with an SMSF.

Here is a quick guide to understanding SMSFs.

What are the basics of an SMSF: legal requirements

The starting point of understanding the legal requirements of an SMSF is understanding, firstly, what an SMSF is and, secondly, what you can do with the money in your SMSF.

Because money is going into super continuously, the biggest misconception clients have is that they perceive superannuation and SMSFs as investments in their own right, like investing in the share market. This is simply not correct. Instead, an SMSF is a tax vehicle or structure, like a company or a family trust, and is subject to similar legal requirements as other trusts and corporate structures. While it can offer major tax benefits, it also comes with some strict restrictions.

As for the money in your superannuation, the fundamental principle of superannuation law is that money is put aside by your employer over your working life for you to live on when you retire from work. The money is invested for the long term and, as a basic rule, cannot be accessed until retirement. The ‘quarantining’ of your super until retirement underpins most of the legal requirements around SMSFs.

It is these two basic principles that underpin the legal concepts around SMSFs.

Why do SMSFs lend themselves so well to property investments?

Property as an asset class is typically considered a long-term investment, which mirrors perfectly the long-term focus of superannuation.

In addition, property investments tend to receive associated rental income as cash and on a regular basis. This regular and consistent cash flow lends itself well to pension withdrawals once a person commences a pension from their fund.

And finally, the concessional tax rate on superannuation investments of 15% is a major advantage when it comes to both rental returns from property investment and CGT incurred when realising the capital growth in a property investment.

The general SMSF investment restrictions

Before you make any decisions on SMSF investments, it’s imperative you understand the restrictions. The basic principle of all the restrictions is that no one associated with your SMSF should get a present-day benefit from its investments (the money is quarantined until retirement).

There are some exceptions; however, generally your SMSF must not:

1. lend or provide financial assistance to members or related parties;

2. acquire assets from members or related parties;

3. use assets in a way that provides a present-day benefit;

4. allow trust distributions owing to the SMSF to remain unpaid;

5. breach the in-house asset rules, being a restriction that the SMSF cannot hold in-house assets that comprise more than 5% of the market value of the SMSF's total assets; or

6. borrow money outside an LRBA.

What is a related party and what is an in-house asset?

Related parties include not only the members of the SMSF (the people whose superannuation is paid into the SMSF) but also:

1. relatives of each member, including a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse;

2. business partners of each member (including their spouses and children);

3. any company or trust the member or their related parties control or influence; and

4. employers who contribute to your SMSF for the benefit of a member.

 An in-house asset is any of the following:

1. a loan to a related party of your fund;

2. an investment in a related party of your fund; or

3. an asset of your fund that is leased to a related party, such as business equipment or machinery (any lease must be made on an arm's length basis and reflect the market value).

How these restrictions apply to property investment and the exceptions

The restrictions generally prohibit an SMSF from lending money and even contributing money to its members or related parties to buy property, including indirect financial assistance (such as paying the deposit under a property contract individually when the SMSF is purchasing the property as the buyer) or using the SMSF as guarantor for a loan for a member or a member's relative.

Once you own the property, you can’t redirect the rent to any party other than the SMSF, or allow members or related parties to live in, rent or stay in the property casually (even for a day, or for repairs and maintenance), as all of these provide a present-day benefit and breach the rules. Residential property cannot be acquired from the members and includes holiday homes. Paying market rent does not overcome this restriction.

It should be noted that the superannuation laws treat business property and residential property very differently. These rules do not apply to business property, which allows a member’s business to rent the property on commercial terms.

Borrowing money for property investments (LRBA)

Originally, an SMSF could not borrow money under any circumstances. Borrowing in SMSFs came about when Telstra was first floated by the Australian Government back in 1997 and involved the use of instalment warrants. Although these were an extremely crude version of borrowing, this opened the door to SMSFs borrowing when previously they were prohibited.

After several iterations, the current version involves what’s referred to as a limited recourse borrowing arrangement (LRBA), which requires the property to be held by a separate custodian entity in a bare trust arrangement. That is, the SMSF still owns the property, but somewhat indirectly until such time as the loan is repaid.

Furthermore, any loan must be limited recourse, meaning the financing business cannot touch the other assets of the fund in the event of default. Typically, this is overcome through the use of personal guarantees by the members of the fund (although not the fund itself).

Complicated rules are involved both in acquiring finance and in regard to the bare trust requirements, which, if not followed, can result in penalties, including double transfer duty.

Breaching the rules

If you don't comply with the investment restrictions, the ATO can take a range of actions, including:

• imposing penalties;

• making the fund non-complying (resulting in tax implications);

• rewinding non-compliant transactions;

• disqualifying you as a trustee; and

• prosecuting members.