Secret money source Aussies are using to invest in property

With an estimated $1.02trn worth of self-managed super fund assets held by more than one million Australians, using funds to buy property is proving a popular venture due to the potential for reliable and a long-term income.

The latest Australian Taxation Office (ATO) SMSF quarterly statistical report for March 2025 revealed there are 646,168 SMSFs with 1,197,293 members of SMSFs.

Non-residential property assets for the March quarter accounted for $111,479 million, while residential property totalled $59,246 million.

The data coincides with latest PropTrack Home Price Index data, which revealed national annual price gains rose to 4.9% in the 12 months to July, with capital city markets leading the charge.

Since the Reserve Bank’s first rate cut earlier this year, price momentum has reaccelerated and broadened, with all capitals seeing prices lift, the data revealed.

National home prices rose 0.39% in May, which marked five consecutive months of growth, and a 4.12% year-on-year increase.

Understanding the pros and cons of using a SMSF to buy property

Propertybuyer chief executive Rich Harvey says buying property with a SMSF is an excellent idea, but there were many myths and misconceptions about doing so.

Propertybuyer chief executive Rich Harvey says there are plenty of misconceptions around buying with an SMSF. Picture: Propertybuyer

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“A lot of people run out of borrowing capacity buying investments in their own personal name, so when you buy a property with an SMSF, it’s not about your personal income and your ability to service a loan,” he says.

“It’s just about the deal, it’s about how much you’ve got in your super fund, and how much yield, or how much return the individual properties that you’re buying, will deliver.

“So if you can find a self-sustaining investment, or, let’s say you’ve got a 20% or even higher deposit, then basically you’re home and hosed.”

The massive tax advantages associated with buying property with a SMSF are significant, Mr Harvey says, with zero capital gains tax when you sell at retirement or pension age.

“The other thing is leverage – when you can buy with a super fund, obviously you still leverage up to normal 80% loan to value ratio without paying mortgage insurance,” Mr Harvey explains.

“So you can buy more property by diversifying, by buying through your super fund – that’s a key benefit, the borrowing capacity.”

CPA Australia superannuation lead Richard Webb agrees buying property with a SMSF as a solid investment pathway was dependent on the funds’ overall strategy, risk tolerance, and liquidity needs.

“Trustees need to consider how property fits alongside their other investments, and whether a large investment, like property, may limit the flexibility of the fund to respond to market or regulatory changes,” he says.

“Trustees should also ensure that investments in property – generally or a single property specifically – are in the best financial interests of fund members.”

Mr Harvey says having at least a 20% deposit, with a buffer to spare, was vital when using funds to buy property, as was ensuring it was high yield.

One disadvantage to note, he warned was you cannot refinance or draw down equity to buy other properties.

“It’s a standalone investment. You can’t leverage against that property to buy other properties like you can in your personal name,” he adds.

Despite some specific negatives, Mr Harvey says using a SMSF to buy property is an excellent strategy.

“There has been a huge increase in demand in our services for buying properties with self-managed super funds – it has risen dramatically,” he says.

“I do a lot of webinars and podcasts about people buying with super funds, so there’s a lot of education around it for building and getting comfortable with it.”

How a recourse loan works

If the fund wants to borrow money to acquire a property, it can only do so by taking out a loan called a limited recourse borrowing arrangement, according to the ATO.

If the fund defaults on the loan, the lender cannot recover the outstanding balance by selling other assets of the fund, an ATO spokesperson says.

A limited recourse borrowing arrangement can be acquired from a commercial lender such as a bank or a related party. 

Mr Webb explains only a small number of institutions offered limited recourse loans due to the strict requirements.

“In the event of default, the lender’s rights are limited to the asset purchased under the LRBA – normally the property itself,” he states.

Only a small number of institutions offered limited recourse loans. Picture: Getty

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“This protects other SMSF assets from being used to cover the debt. However, a forced sale of the property may result in a loss if the property has decreased in value, which may disrupt the fund’s ability to meet other obligations.

 “This reinforces the importance of maintaining adequate liquidity buffers and regularly reviewing the fund’s capacity to service the loan.”

Under the SMSF structure, there were tax implications that some people might not be aware of, Mr Webb notes.

“There are some limitations to deducting borrowing costs and depreciation and capital gains tax (CGT), as part of fund earnings tax, is only eligible for a reduction of a third on assets held for more than 12 months, unlike the CGT discount outside of super which provides a 50 per cent discount,” he explains.

An overview of ATO rules to consider

When looking to invest in property through a SMSF, some of the ATO’s key obligations include:

• The investment property must not cause the fund to contravene the ‘sole purpose test’, which means the property can only be used for the purpose of providing retirement benefits to the SMSF members.The fund’s investment strategy should document how the fund’s property investment will benefit members’ retirement goals. There should also be sufficient liquidity in the fund to service ongoing costs associated with the property and ensuring the SMSF is able to meet its other fund obligations such as paying out the minimum pension payments and taxation liabilities.
•  A related party of a fund member cannot have residential property purchased for them by the fund. Additionally, it cannot be lived in, or rented by a fund member or any related parties. 
• If solely used for business purposes, commercial property can be acquired by the fund from a member or a related party, providing the acquisition is at market value. It can also be leased to a fund member or related parties.  
• All SMSF transactions must be made on an arms-length basis. This means that any acquisition or disposal of a property by the fund must be at market value, and any income generated from the property should show a true market rate of return. 

This article first appeared on Mortgage Choice and has been republished with permission.