Buying Property Through an SMSF in Victoria: Rules, Eligibility, and Strategic Rationale

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Introduction

Purchasing property through a Self-Managed Superannuation Fund (SMSF) is a popular strategy for investors looking to grow wealth in a tax-effective environment. However, doing so involves strict compliance with both federal superannuation laws and state property laws.

This article outlines who can purchase property through an SMSF, what types of property can be acquired (residential and commercial), and under what conditions. It details the relevant legislation, including the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), ATO guidelines, and Victorian property laws such as the Sale of Land Act 1962 (Vic) and Transfer of Land Act 1958 (Vic). It also explores the use of Limited Recourse Borrowing Arrangements (LRBAs), prohibited transactions, and why an SMSF might purchase property as part of its investment strategy.

Who Can Buy Property Through an SMSF?

An SMSF can have up to six members. Each member must also be a trustee (or director of the corporate trustee) of the fund. To be eligible, the person must:

  • Not be an undischarged bankrupt

  • Not have been convicted of an offence involving dishonesty

  • Not have been disqualified by the ATO or ASIC from acting as a trustee

  • Have the capacity to understand and discharge trustee duties

The fund must be established for the sole purpose of providing retirement benefits. This is known as the sole purpose test under section 62 of the SIS Act. Every investment decision, including a property purchase, must align with this purpose.

What Property Can an SMSF Purchase?

Residential Property

An SMSF may acquire residential investment property, but the following conditions apply:

  • The property must be acquired from an unrelated third party

  • It must not be used or occupied by a member or their relatives

  • It must not be leased to related parties

Personal use is strictly prohibited. This includes short-term stays, holidays, or any occupancy by the fund's members or their associates.

Commercial Property

SMSFs have more flexibility when it comes to commercial property, including:

  • Acquisition from a related party, provided it qualifies as business real property

  • Leasing to a related party, such as a member’s business, provided the lease is on arm’s-length terms

The definition of business real property is provided under SIS Act section 66 and clarified in ATO Ruling SMSFR 2009/1. It refers to land and buildings used wholly and exclusively in one or more businesses. Examples include offices, warehouses, medical suites, or factories used by the member’s business.

To maintain compliance:

  • Rent must be charged at market rate

  • A formal lease agreement must be executed

  • Rent must be paid on time and recorded in the SMSF’s bank account

  • The arrangement must be documented and reviewed annually

Legislative and Regulatory Framework

Federal Legislation (SIS Act 1993)

Key obligations under the SIS Act include:

  • Section 62 – Sole purpose test

  • Section 65 – Prohibition on financial assistance to members

  • Section 66 – Restrictions on acquiring assets from related parties

  • Section 67 – Prohibition on borrowing

  • Sections 67A and 67B – Exceptions for Limited Recourse Borrowing Arrangements (LRBAs)

  • Section 109 – Requirement for arm’s length dealings

  • Part 8 – In-house asset restrictions (5% rule)

ATO Rulings

Relevant ATO rulings and guidance include:

  • SMSFR 2009/1 – Business real property definition

  • SMSFR 2012/1 – Interpretation of LRBAs, including improvements, repairs and replacement assets

  • PCG 2016/5 – Safe harbour terms for related-party loans in LRBA structures

Victorian Legislation

Property transactions by an SMSF in Victoria must comply with:

  • Sale of Land Act 1962 (Vic) – Including section 32 Vendor Statement requirements

  • Transfer of Land Act 1958 (Vic) – Title registration in the name of the SMSF trustee or bare trustee

SMSFs must also comply with state-based stamp duty, land tax, and foreign purchaser surcharges (where applicable).

Limited Recourse Borrowing Arrangements (LRBAs)

Section 67A of the SIS Act permits an SMSF to borrow under strict conditions. This structure is called a Limited Recourse Borrowing Arrangement (LRBA) and involves:

  • The asset being held on trust by a bare trustee

  • The SMSF acquiring a beneficial interest in the asset

  • The SMSF having a right to acquire legal ownership once the loan is repaid

  • The loan being limited in recourse to the asset itself (i.e. no other SMSF assets may be accessed by the lender)

Borrowed funds must not be used to:

  • Improve the asset (only repairs and maintenance are permitted)

  • Acquire multiple properties (only one acquirable asset per LRBA)

Borrowed funds can be used to cover costs of acquisition (stamp duty, legal fees, etc.) and repairs that restore the asset to its original condition.

The loan must be:

  • On arm’s-length terms

  • Well documented, with interest, terms, and security clearly set out

  • Compliant with ATO guidance or safe harbour provisions

Prohibited Transactions and Related Party Rules

An SMSF must avoid the following:

  • Purchasing residential property from a related party

  • Allowing members or relatives to use SMSF-owned residential property

  • Using fund property as security for a member’s personal or business borrowing

  • Exceeding 5% of the fund’s assets in related-party investments or loans

  • Charging below-market rent to related-party tenants

If a transaction is not at arm’s length, the ATO may deem the income non-arm’s length income (NALI) and tax it at the top marginal rate.

Why Use an SMSF to Buy Property?

1. Business Premises for Your Company

Small business owners often use their SMSF to purchase their own business premises. Rent is paid from the business to the SMSF, generating retirement savings in a tax-effective manner.

2. Tax Efficiency

SMSFs pay a maximum of 15% tax on rental income and 10% tax on capital gains (if the asset is held longer than 12 months). Once the fund enters pension phase, rental income and capital gains may be tax-free.

3. Asset Protection

Property held in an SMSF is protected from creditors of the member or their business.

4. Leverage with Super Contributions

Borrowed funds can be repaid using concessional super contributions (subject to caps), allowing property to be acquired with pre-tax dollars.

5. Diversification and Control

Direct property gives trustees control over investment decisions and may diversify the SMSF’s portfolio beyond cash and shares.

Compliance Obligations for Trustees

SMSF trustees must:

  • Maintain an up-to-date investment strategy

  • Keep the property insured in the fund’s name

  • Pay all expenses from the SMSF bank account

  • Ensure leases are formalised and reviewed regularly

  • Keep comprehensive records and minutes of all decisions

  • Conduct annual independent audits and provide evidence of market valuations

  • Lodge annual tax returns and comply with Duties Online and Land Tax requirements

Conclusion

Buying property through an SMSF in Victoria is a highly regulated yet potentially rewarding investment strategy. Trustees must strictly adhere to federal superannuation law and Victorian property law. Only commercial properties may be purchased from related parties, and residential properties cannot be used by members.

Borrowing is only permitted through a compliant LRBA structure. The property must be acquired solely for retirement purposes, with all dealings at market value. When used correctly, SMSFs offer tax benefits, control, and long-term asset protection. However, the structure is complex, and professional advice is essential.