Buying direct property using your Superannuation-Part 2

While buying direct property using your Super is now within reach for many more Australian's, there are additional risks and rules that you need to comply with.

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Blogger: Justin Beeton, The SMSF Club

Part 2 of this article covers some of those additional restrictions. For more information as to how you can buy direct property using your Super it is critical you seek independent advice. 

Borrowing Restrictions

When entering into any form of borrowing arrangement there are additional restrictions, most notably the borrowed money must be used to acquire a ‘Single Acquirable Asset’ (‘the asset’).


What is a Single Acquirable Asset?

Put simply, a Single Acquirable Asset can be defined as a single object of property; for example an apartment, residential property, or a block of vacant land.

Further, the Single Acquirable Asset can comprise two separate assets at law and be treated as the one asset for the purpose of borrowing in a SMSF. This often happens when the two assets are inseparable, such as an apartment with a car park on separate title that cannot be sold separately, or the two assets are acquired under a single contract, such as a house and land package. Under both scenarios the two assets will be treated as one Single Acquirable Asset, and as such, borrowing can be used to acquire them.

2 common mistakes made by SMSFs using borrowed funds to buy property include:

1.    Building a house on an existing block of land owned by the SMSF. A house is not a single acquirable asset in its own right. Money borrowed to build the house effectively results in the acquisition of services and building materials, not a single acquirable asset.

2.    Serviced apartments. The apartment without the furniture is a Single Acquirable Asset. However, the apartment and the furnishings package, even if purchased together under the one contract, is not a Single Acquirable Asset. The furnishings package, even if purchased under a separate contract is not a Single Acquirable Asset as it would include multiple items.

What is a related party?

A related party is a member or trustee of the SMSF, a relative of the member or trustee, an entity which the trustee or member controls, or an employer who pays into the SMSF.

What is business real property?

Business real property is real estate which is used wholly and exclusively for business purposes. The business can be run by a member of the fund, a related party or any other party. A SMSF can acquire business real property from a related party so long as it is acquired at market value.

For more information on purchasing property through a SMSF, please contact one of The SMSF Club experts.

A common question is to whether you can renovate your property if owned by your SMSF?

Borrowings cannot be used to fund improvements to the asset. However, money from other sources can be used to improve the asset. For example, accumulated funds held by the SMSF may be used to fund the improvements.

However, any improvements cannot result in the asset becoming a ‘different asset,’ as the asset identified when the limited recourse loan is put in place must continue to be the asset that is held on trust under the LRBA (limited recourse by arrangement).

General test: If an improvement will fundamentally change the character of the asset as a whole, then this will result in a different asset being held on trust under the loan. If this happens, you will be in contravention of the superannuation laws.

Here are some examples of a different property types and how the restrictions may apply.


Scenario Result
Buying a vacant block of land under an LRBA and subdividing it into multiple titles The improvement has resulted in a different asset
Buying a vacant block of land under an LRBA and building a house on the vacant land The improvement has resulted in a different asset
Fire demolishes house under an LRBA and is replaced by three strata titled units The improvement has resulted in 3 different assets
A residential house under an LRBA is converted into a restaurant The improvement has resulted in a different asset
A room in a residential house under an LRBA is converted into a home office The improvement would NOT result in a different asset

The following improvements to residential house under an LRBA: A kitchen renovation, an extension to add two bedrooms, a swimming pool, a garage or an outdoor entertainment area

The improvements would NOT result in a different asset
The addition of a fully functional ‘Granny Flat’ The improvement would NOT result in a different asset 

When there is no loan agreement or borrowing associated with the SMSF over the property you can use cash in the SMSF to fund renovations and improvements. However, when there is a limited recourse loan associated with the asset you have additional restrictions and any improvements will not be allowed.


Now the rules have changed, direct property ownership is now a possibility for more Australians within super. The increased complications and restrictions that exist for buying property using a SMSF however, means you should seek professional assistance and investment advice. You also need to ensure buying direct property is in line with the SMSFs investment strategy and it would be very wise to consider the overall benefit of diversification. The cost of going it alone and making a mistake could be huge. You could be up for double stamp duty if you purchase the property in the wrong entity, or cope severe penalties for breaching the SIS Act.

By incorporating borrowed funds to purchase an investment property, you have the capacity to accelerate gains as you simply have more money invested. You also have at least the opportunity to consider direct property ownership within Super, which for many generations has been the main way so many people have become self funded retirees. As industry and retail funds are usually restrictive as to where they can and can't invest their funds a SMSF now has a huge advantage over these traditional superannuation vehicles.

Happy Investing,

Justin Beeton


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