Rules for Unlocking Equity in SMSF Property

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.

Rules for Unlocking Equity in SMSF Property

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.

---

UNDERSTAND THE SMSF JOURNEY

Every SMSF journey is unique. Connect with our team to explore SMSF considerations and understand how different professionals may fit into the process.

EXPLORE YOUR SMSF OPTIONS >

(GENERAL INFORMATION ONLY)

---

DISCLAIMER: This article is provided for general information and educational purposes only. It does not constitute financial, legal, tax, investment, or other professional advice and has been prepared without taking into account your personal objectives, financial situation, or needs. This article may include perspectives from industry contributors. Contributor participation does not imply endorsement, recommendation, or preferred referral status. While reasonable care has been taken in preparing this content, no representation or warranty is made as to its accuracy, completeness, or currency. SMSF Intelligence does not accept liability for any loss or damage arising from reliance on this information or any linked materials. SMSF Intelligence does not provide financial, legal, or tax advice. Before making any decisions, you should consider the appropriateness of the information in light of your circumstances and seek advice from a suitably qualified and licensed professional.