A guide to SMSF property investments: The pros & cons.

Did you know that 82% of Australians have to keep working past their retirement age or go on the pension, which is just $23k/year? Despite a lifetime of super contributions, too many people end up spending their retirement living below the poverty line.

Luckily, there’s an opportunity to get much more out of your super. Using a Self-Managed Super Fund to invest in property is a great way to unlock the true potential of your super and secure your dream retirement lifestyle. Although there are many advantages to this powerful investment strategy, there are also be some downsides to consider.

So – let’s take a look at some of the pros and cons.


  1. It can be a more tax-effective option

One of the biggest benefits of using a SMSF to invest in property, is that it gives you access to special tax rates that are not available when investing outside of an SMSF. Any income generated from your investments within the SMSF during the accumulation phase will only be taxed at capped rate of 15%. Meanwhile, an investor with a high rental income could be taxed as much as 46.5% outside of an SMSF.

Pretty amazing, right? … But it gets even better!

When you retire and your Super goes into the pension phase, there is no tax at all on your investment income. The Capital Gains Tax on the sale of property within an SMSF is effectively  10% if held for more than 12 months, but this will also go down to $0 once you retire and your super is in the pension phase.

There are also special negative gearing benefits for property inside an SMSF. Through your SMSF, you are eligible to claim tax deductions against virtually all costs associated with the purchase, management and sale of the investment property. This includes interest payments on the loan, advertising for a tenant, letting agent fees, and property depreciation. Investment-related insurance is also tax deductible, as long as the insurance policy is in the name of your SMSF.  These special deductions can save you thousands in tax over the life of an investment property, but if your investment property tax return is not in the hands of a specialist SMSF accountant with property investment expertise, then you could be missing out big time! Always be sure to leave your SMSF tax returns in the hands of the experts.

2. LRBA’s for low risk investment

Loans obtained through your SMSF are called Limited Recourse Borrowing Arrangements, or an LRBA. LRBA’s make buying property through your SMSF a relatively low risk investment compared to other options, because if something does go wrong with the loan, the only asset at risk is the property itself. This protects the investor and prevents the bank from taking action against any of your other assets. Assets held in a SMSF will also be protected against any general debt recovery and bankruptcy proceedings. Phew!

3. Buy property you cannot otherwise afford

Setting up a SMSF allows up to four people to combine their super savings to buy more expensive assets, which may otherwise be beyond their reach. For example, if your family owns a small business, a SMSF will enable you to purchase commercial or industrial property and lease it back to the business at the market rate. This is a great way to free up the funds to support your business growth, all while investing wisely for your retirement. Even outside of a business context, the ability to combine your super with your partner or other family members can enable you to meet the deposit requirements of a more expensive residential investment property. In short, an SMSF  may give you the purchasing power you need to invest in a larger asset and enjoy far greater returns in retirement.

4. Your boss will help repay the loan!

Not every property investor can say their boss is directly helping them pay back their mortgage! Every employer must make compulsory superannuation contributions on top of your wage or salary. This contribution is currently 9.5% of your total earnings (pre-tax) and must be paid at least four times a year. With property in a SMSF, the super paid by your boss can be used to help repay any loan associated with the property. What a great perk!


  1. Can be an expensive hassle to set up

There’s no doubt about it – buying a property in your own name involves far less paperwork and fewer upfront costs than investing through an SMSF. This is due to the many rules and restrictions concerning what you can and can’t buy, when you can sell it, and what you can do with the property while you have it. You see, this kind of investment must meet the ATO’s sole purpose test of providing retirement benefits to fund members.

In the case of a SMSF, the banks will rarely offer a loan of more than 70-80% of the purchase price, and it will usually come at a higher interest rate than for a regular investment property loan. It’s also important to consider that there must always be enough cashflow into the SMSF to service the debt, as well the set-up costs and ongoing compliance fees. If you’re considering this investment option, make sure your accountant is an expert in establishing SMSF Deeds and Bare Trusts for property purchases – it will save you a lot of hassle! Your SMSF Accountant will devise a strategy to ensure these initial set up costs are balanced out by the long-term benefits.

2. Concentrated asset risk

A liquid asset is one that can quickly and easily be converted to cash, lowering the risk of being unable to meet your expenses in the future. Shares are a good example of liquid assets, as they can be sold to meet your needs at any point, without any extra costs. Property on the other hand, is what’s known as an illiquid, or ’lumpy’ asset. If it becomes difficult to find tenants to rent the property, it will need to be sold. As it takes time and money to market, sell and settle a property, the process can be very problematic in the retirement phase when income is needed to pay pensions to the fund’s members.

When the majority of funds within your SMSF go towards one single asset, the investment risk is much higher. Don’t let this put you off though! Depending on your individual circumstances, your long-term reward may far outweigh the risks. Find out now!

3. Missed investment opportunities

If you have a SMSF and all the money in the fund is going towards your property investment, not only are you concentrating your asset risk, but you may also miss out on some great opportunities in shares or other investments. Remember that it’s always safer and more lucrative in the long-term to have a diverse investment portfolio. The bottom line is, make sure that using your SMSF to purchase a property won’t leave you trapped in a risky and limited financial situation. Talk to an expert SMSF accountant today to find out how to make diversification part of your SMSF investment strategy!

4. Strict rules and penalties for non-compliance

Investor beware: Non-compliance could drain the retirement savings of every member of a SMSF, not to mention the civil and criminal charges trustees can face for more serious breaches.

So – the most important thing you need to know about buying property through a SMSF, is that the investment must meet the sole purpose test of providing retirement benefits to fund members. Here are just some of the rules to remember when consider this investment option:

  • The property must not be lived in, rented, or sold to any individual member of the SMSF trust.
  • The property cannot be lived in, rented, or sold to any related party (ie. family)
  • If the property is sold, the proceeds must remain in the super fund.
  • Only one single asset is allowed for each LRBA
  • You may not use any of the loaned money for renovations or improvements to the property. Other money in the fund must be used for this.

For further clarification on these rules, talk to the SMSF compliance experts at ABA Tax and avoid any trouble from the ATO.

5. May be more tax benefits to investing outside of super

Depending on your individual circumstances, this may not be the most tax-effective investment strategy for you. Always remember that borrowed money cannot be used for any renovations or improvements, and when the property is sold, all profits must stay in your super fund until you retire. To decide which property investment strategy is be right for you, talk to the experts in investment property reporting and taxation.

At ABA Tax we believe knowledge is power, so we’ve partnered with Class Super to give you access to real-time reports on your SMSF position and portfolio performance with no hassle and no extra cost. As with all investments, there is no ‘one-size-fits-all’ solution – it will always depend on your individual circumstances.

In addition to handling the legal and compliance aspects of your investment, ABA Accountants in Southport can help with managing your SMSF and advise you on the most effective repayment plans to ensure you get the most profitable returns. Whether you’re thinking about buying residential or commercial property with a SMSF, or you already have property in your SMSF,  ABA can definitely simplify your life!

You see… ABA are much more than your average Gold Coast accountants. We are specialised SMSF Accountants with over 20 years experience in the Real Estate industry. In other words, we really understand property! Get in touch for an obligation-free chat about your future today.

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