Rules for Unlocking Equity in SMSF Property
- Lucas Seow CPA
- May 16
- 2 min read
Updated: Oct 29
Investing in property through a Self-Managed Super Fund (SMSF) can be an effective strategy to build retirement savings, but there are strict rules that trustees must follow. One common question is whether SMSF members can access equity in the property or use the property as security for another loan. The short answer is no, except in very limited circumstances related to property maintenance.
Equity Release Restrictions
SMSF trustees are prohibited from taking out equity from properties held within the fund for personal purposes. Borrowing within an SMSF must comply with the sole purpose test, which ensures that all activities are solely for providing retirement benefits.
This means funds cannot be used for personal expenses, buying cars, or purchasing additional properties. The fund’s property must remain dedicated to investment purposes, in accordance with superannuation laws.
Using SMSF Property as Security
SMSF regulations also prevent members from leveraging fund properties to secure other loans. Any attempt to use an SMSF property as collateral outside the limited recourse borrowing arrangement (LRBA) framework would breach superannuation law and could result in the fund being non-compliant. Lenders can only lend under a structured LRBA, where the lender’s recourse is limited to the specific asset purchased by the SMSF.
Repairs and Renovations
While equity release and leveraging are restricted, SMSFs are permitted to fund repairs and maintenance of properties held within the fund. These activities involve restoring the property to its original condition and can be funded using the SMSF’s own resources, such as cash reserves or member contributions.
Renovations or improvements, however, are more tightly regulated. Borrowed funds from an LRBA cannot be used for enhancements, and any improvement must not change the fundamental nature of the property. For example, converting a single dwelling into multiple units would violate SMSF property rules. Trustees must ensure compliance with ATO guidance, including SMSFR 2012/1, when planning any work on the property.
Summary
The rules surrounding SMSF property, borrowing, and improvements are complex. Trustees who fail to comply risk penalties, loss of fund compliance, or adverse tax consequences. Engaging experienced SMSF mortgage brokers and other professionals who understand the nuances of SMSF property investment is essential to navigate these restrictions effectively and protect your retirement savings from compliance risks and penalties.
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DISCLAIMER: This article is for general informational purposes only and does not constitute financial, accounting, legal, or SMSF advice. It does not take into account your personal financial situation or objectives. Please consult a licensed professional before acting on any information regarding SMSFs, trustee structures, or compliance obligations. #SMSFProperty #SMSFCompliance #LRBA #SuperannuationInvestment
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