Property in SMSFs: Options, Risks and Compliance Considerations

Property investment through a Self Managed Super Fund (SMSF) continues to attract trustees who value tangible assets, long-term income potential and a sense of control over their retirement savings.

Interestingly, the recent 2026 budget announcements regarding changes to capital gains calculations excluded properties held in an SMSF. This means the maximum capital gains tax payable remains at 10 per cent where the SMSF has held the property for more than 12 months. If members are in pension mode when the gain is realised, the capital gains tax may be nil under the current law.

Although the budget announcements have not been legislated at the time of writing, we expect focus on the benefits of holding property via an SMSF as an investment vehicle to increase.

When structured appropriately, property can form an effective part of a long-term SMSF investment strategy.

While property is a familiar and well-understood asset, the way it must be acquired, used and managed within an SMSF can introduce significant complexity. Strict regulatory rules apply to acquisition, use, financing, valuation and ongoing management throughout the life of the investment.

Given the complexity of these requirements, trustees often seek specialist advice to ensure their fund remains compliant and aligned with its long-term objectives. Bentleys’ SMSF advisory team works with trustees to navigate these obligations and make informed investment decisions.

Many of the issues that arise with SMSF property do not occur at the time of purchase. They tend to emerge later, as the fund matures, members approach retirement, and liquidity and compliance pressures increase. This article explores why property remains popular, the main ways it can be held inside an SMSF, and the key risks and compliance matters trustees should understand.

Why Is Property in SMSFs Popular?

Property continues to be one of the most commonly considered assets for SMSFs for several key reasons:

• Familiarity and tangibility – Trustees often feel more comfortable investing in assets they can see and understand.
• Perception of long-term stability – Property is commonly viewed as a lower-volatility, long-term investment aligned with retirement outcomes.
• Income potential – Rental income can support accumulation strategies and, later, pension payments.
• Control and transparency – Trustees retain control over acquisition, leasing and management decisions.
• Business real property opportunities – Business owners may be able to lease commercial property from their SMSF, provided strict rules are met.

While these factors drive interest, they can also mask the structural and compliance complexity that property introduces within a superannuation environment.

How Property Is Held in an SMSF

Property investment through an SMSF involves purchasing and holding real property within the superannuation environment. When an SMSF invests in property, it holds the asset for the sole purpose of providing retirement benefits to members.

Compliance obligations apply for as long as the fund owns the property, regardless of whether the fund is in accumulation or pension mode. These obligations include permitted use, lease arrangements, valuation, liquidity management and, where relevant, borrowing arrangements. For example, residential property can only be leased at market value to a non-related party, even once members retire and commence a pension.

The structure chosen at acquisition has lasting implications for liquidity, flexibility and ongoing administration.

Each structure can be effective when aligned with the fund’s investment strategy, cash flow position and long-term objectives. The most common approaches are outlined below.

Each option can be beneficial in the right circumstances, but each also carries distinct risks that must be managed over time.

Purchasing Property Outright

Purchasing property outright is often viewed as the simplest way for an SMSF to invest in property. It avoids borrowing costs, interest and lender requirements, but typically results in a large proportion of fund assets being tied up in a single, illiquid investment.

This concentration can restrict the fund’s ability to manage cash flow, pay expenses and meet benefit payments, particularly once pensions commence.

Limited Recourse Borrowing Arrangements (LRBAs)

An LRBA allows an SMSF to borrow funds to acquire a single asset, with the lender’s rights limited to that asset. While borrowing can improve affordability, it also creates long-term compliance obligations.

Key considerations include:

• Higher establishment costs, including the establishment of a bare trust to hold the property’s title.
• Restrictions on improvements and property alterations.
• Reduced flexibility if refinancing or restructuring is required.

LRBAs require careful structuring at commencement and active oversight to avoid contraventions of superannuation law. However, they can provide a pathway to acquiring property that may otherwise be out of reach.

Purchasing Property Within a Partnership

Partnership arrangements allow an SMSF to acquire property alongside other parties, which can reduce the initial capital requirement.

However, this approach limits control and exposes the SMSF to the actions and financial circumstances of its partners. Trustees remain responsible for SMSF compliance regardless of partner behaviour.

For example:

An SMSF co-owns a property with a related party company, such as a company controlled by a member. When significant repairs are required, the company cannot afford to pay its share. To protect the property and rental income, the SMSF pays the full cost and does not recover the amount.

This arrangement may raise compliance issues under the SIS Act, as it may be considered the SMSF providing financial assistance to a related party.

Property Trust Structures

Property trust structures involve indirect ownership through units or interests in a trust rather than direct ownership of the property. They may offer indirect exposure and diversification benefits.

In practice, these structures:

• Increase administrative, audit and valuation complexity.
• Carry heightened compliance risk, particularly around related-party dealings, loans and valuations.

Specialist advice is essential before considering these arrangements.

Key Risks and Considerations

Property introduces a unique combination of financial, operational and compliance risks requiring active management.

Common Issues Identified in SMSF Audits

From an audit perspective, problems typically arise well after acquisition. Common issues include:

• Personal use or present-day benefit, resulting in a breach of the sole purpose test.
• Below-market or undocumented lease arrangements, particularly with related parties.
• Failure to review and update the investment strategy as the fund matures.
• Liquidity pressures when members move into pension phase.
• Incorrect improvements, refinancing or variations under LRBAs.

These issues highlight the need for continuous oversight rather than a set-and-forget approach.

Liquidity and Diversification Risks

Regardless of structure, property is inherently illiquid. Over-reliance on a single asset can limit the fund’s ability to meet expenses, comply with pension requirements or adapt as members age.

These risks are not unique to all SMSFs, but they highlight the importance of ongoing oversight and informed decision-making.

Key Compliance Areas for Property in an SMSF

Final Thoughts

Property can play a valuable role in an SMSF investment strategy, but it is not a passive investment. It requires careful planning and ongoing management.

Decisions made at acquisition, particularly around structure and borrowing, often determine how well the fund can manage liquidity, compliance and benefit payments later in its life.

Trustees with the right advice and active oversight are better positioned to navigate these complexities.

For more information about property in SMSFs, contact Jodi Lupton, who specialises in SMSF compliance and advisory services.