Can Your SMSF Increase Your Investment Capacity? A Guide for Self-Managed Super Funds

A Self-Managed Super Fund (SMSF) gives trustees greater control over how their retirement savings are managed.  For some trustees, borrowing through an SMSF, usually to purchase property, may be a way to expand their investment strategy. However, SMSF lending is governed by strict rules under Australian law, and it’s important to understand what is allowed, what isn’t, and what factors influence borrowing capacity.This guide provides general information to help you understand the basics before seeking specialist advice.

Can-Your-SMSF-Increase-Your-Investment-Capacity-A-Guide-for-Self-Managed-Super-Funds

Can an SMSF Borrow Money?

Yes, an SMSF can borrow money, but only under specific arrangements known as a Limited Recourse Borrowing Arrangement (LRBA). Under an LRBA, the SMSF uses borrowed funds to purchase a single permitted asset (most commonly residential or commercial property), and the lender’s recourse is limited solely to that asset. This means the other assets held within the SMSF are generally protected if the loan cannot be repaid, one of the key structural requirements of SMSF borrowing.

How Borrowing May Increase Investment Capacity

Borrowing within an SMSF may increase the fund’s ability to acquire higher-value assets than it could with its existing balance alone. For example, a fund with $300,000 may be able to purchase a more substantial property if borrowing is involved, subject to lender criteria and legal restrictions. However, increased investment capacity comes with increased risk, and trustees must carefully assess:

  • The fund’s ability to meet loan repayments;
  • Liquidity requirements;
  • Diversification of the SMSF’s asset holdings;
  • Long-term tax and retirement implications;
  • The SMSF’s investment strategy and trust deed requirements.

Trustees must also ensure the investment aligns with the sole purpose test, meaning it must be made solely to provide retirement benefits for fund members.

Factors That Lenders May Consider

Lenders who offer SMSF loans typically review a range of factors, such as:

  • The fund’s current balance and contribution levels;
  • The rental income and expected yield of the property being purchased;
  • The SMSF’s liquidity position after settlement;
  • The fund’s ability to meet loan repayments;
  • The structure and compliance of the SMSF and trust deed.

Because SMSF lending carries additional legal and operational requirements, assessment criteria can vary significantly between lenders.

What Types of Property Can an SMSF Borrow For?

Under LRBA rules, the SMSF can typically borrow to purchase:

  • Residential investment property (not occupied by a fund member or related party);
  • Commercial property, including premises leased to a related party if the lease is at market rates and complies with ATO rules;
  • Some forms of industrial or specialised real estate, subject to lender policy.

Borrowing cannot be used for:

  • Property improvements that fundamentally change the asset
  • Purchasing assets that do not comply with the fund’s investment strategy
  • Acquiring residential property from a related party

Repairs and maintenance are permitted, but renovations that change the character of the property are generally not allowed under a borrowing arrangement.

Risks and Considerations

Borrowing through an SMSF involves several important risks and obligations:

Reduced Liquidity

Loan repayments, property expenses, and potential vacancies can impact the fund’s ability to meet other obligations, including minimum pension payments in retirement.

Higher Costs

SMSF loans may involve additional fees, professional advice costs, and lender conditions compared to standard home loans.

Compliance Obligations

SMSFs are highly regulated. Trustees must ensure every step complies with ATO rules, superannuation law, and the trust deed.

Long-Term Impact on Retirement Outcomes

Borrowing may amplify both gains and losses, and the long-term effect should be considered carefully with advice from qualified professionals.

Can Borrowing Fit Into Your SMSF Strategy?

SMSF borrowing may suit certain trustees who:

  • Have a strong, articulated investment strategy;
  • Understand the risks and responsibilities involved;
  • Have sought independent legal, tax, and financial advice;
  • Have a fund with sufficient liquidity and contributions to meet obligations.

However, it is not suitable for all SMSFs, and trustees should avoid assuming that borrowing automatically improves returns or investment potential.

Borrowing through an SMSF can increase investment capacity, but it introduces additional risks, responsibilities, and compliance requirements. Before considering any SMSF borrowing arrangement, trustees should ensure:

  • They fully understand the rules;
  • They have a strong, compliant investment strategy;
  • They have received professional independent advice from licensed experts.

With the right structure and guidance, SMSF borrowing can be one component of a well-planned retirement strategy, but only when approached with care and compliance in mind. Learn how SMSF borrowing works and what may affect your fund’s investment capacity. General information only from BrokerCo, SMSF lending experts.

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