It seems that self-managed super funds (SMSFs) are on the tip of everyone’s tongue these days. So what’s the deal? It used to be that there was a ban on borrowing within super. However, ever since changes were brought into the Superannuation Industry Supervision Act (SIS Act) in 2007, buying a property through an SMSF has become an option. This arrangement is also called a limited recourse borrowing arrangement and there are various benefits particularly from a tax perspective. One of the obvious benefits is that if owners sell in the pension phase, it is capital gains tax free.

This sort of arrangement involves your SMSF borrowing money to buy an asset that will be held in a Holding Trust . This Holding Trust can only house more than one asset if all assets are the same and have the same value, such as a parcel of shares. In particular, the SMSF trustee can place an investment property into this Holding Trust.

The Holding Trust has its own trustee, which can be anyone except the super fund trustee. It is generally preferable to have a corporate trustee so that any deaths or changes in the underlying membership of the fund will not affect the trustee’s property holdings. A lot of banks require a corporate trustee, and will usually want to look at the Holding Deed before they grant loan approval. Banks may have further requirements, and demand greater costs to establish this sort of loan as their recourse is only to that property in the Holding Trust, and not the whole of the assets of the super fund (this is why it is called “limited recourse borrowing”); the Holding Trust in effect quarantines this asset from the rest of the super fund.

There are various rules in the SIS Act in relation to borrowing for an investment property such as those rules against improvement. Whilst you are allowed to repair and maintain the asset with the borrowed monies, there are strict rules against improvement. Repairing means the act of making good defects, damage or deterioration, including the renewal of parts (but not reconstruction), and maintaining includes acts which prevent those defects or damages. Improvements are substantial alterations or the addition of further substantial features or rights to the asset.

It is very important to seek professional advice before proceeding with SMSF borrowing as if requirements are breached you could face serious penalties , and the SMSF could lose tax concessions. Further, the rules in relation to improvement of an asset are complex, and there has been some confusion in this regard. It is also prudent to remember that SMSF borrowing should be part of a sound investment strategy that complies with the proper purpose of an SMSF which is the provision of retirement savings.

If you have any questions about SMSFs, or SMSF borrowing, feel free to contact Paul Tonkin, Partner or Davina Borrow-Jones – Senior Associate.


These provisions are to be reviewed again in 2 years time.

We can assist with the drafting of your Holding Trust Deed.
We can also assist with setting up a corporate trustee.
See s 67A(1)(a)(i) of the SIS Act.
However, improvements may be made with monies other than the borrowed monies eg with superfund monies, provided the improvements do not result in a different asset. The asset will become a different asset if the alteration or addition is to such an extent that its character is fundamentally changed. An example of an allowable improvement is an extension to add a bedroom, or the addition of a swimming pool or garage shed. An example of an improvement which results in a different asset is the change of a residential house to a restaurant. SMSFR 2012/11
See s 67(7) of the SIS Act; you could face civil and criminal penalties.