Authors: Charlie Dang & Wilson Phan
Reading Time: 6 mins
With the recent law change for Self-Managed Super Fund (SMSF) borrowings, the Government has eliminated the long-standing strategy that many SMSF trustees have implemented to invest in residential properties.
Pursuant to subsection 67(1) of the SIS Act 1993, SMSFs in general are prohibited from borrowings. The prohibition intents to limit the risk contingent to borrowings. This aligns with the sole purpose test ruled under section 62 of the Act, which protects super money from reckless investment by the trustees, and for the primary purpose of providing for the member’s retirement.
An exception is given by section 67A of the SIS Act 1993 to allow SMSFs to borrow under a ‘Limited Recourse Borrowing Arrangement’ (‘LRBA’) to acquire a ‘single acquirable asset’ such as a real property or a collection of shares in a single company, etc.
On 23 June 2026, the Government announced a law change to this section 67A for SMSF borrowings. As a result, all future LRBAs for property contracts exchanged on or after 10 August 2026 for purchasing residential properties will be banned.
An additional paragraph will be added at the end of subsection 67A(2) to limit the definition of ‘acquirable asset’.
The revised Subsection 67A(2) of SIS Act 1993 will be effective from 10 August 2026 as follows:
“…(2) An asset is an acquirable asset if:
(a) the asset is not money (whether Australian currency or currency of another country); and
(b) neither this Act nor any other law prohibits the RSF trustee from acquiring the asset.; and
(c) for an asset that is real property—the asset is business real property (within the meaning of section 66 of this Act)…”
For SMSF trustees who still wish to invest in residential property, there are two alternative options as follows.
Option 1: SMSF co-invests with a related party through a unit trust
Regulation 13.22C of SIS Reg 1994 gives an exception from in-house asset ruling (section 71 of SIS Act 1993) for investments in a related unit trust. Under this regulation and pursuant to section 71(1)(j)(ii), a unit in a unit trust acquired by an SMSF is not an in-house asset if, when the unit is acquired:
“…(e) a trustee of the unit trust, does not have outstanding borrowings; and
(f) the assets of the unit trust do not include:
(i) an interest in another entity; or
(ii) a loan to another entity, unless the loan is a deposit with an authorised deposit - taking institution within the meaning of the Banking Act 1959 ; or
(iii) an asset over, or in relation to, which there is a charge; or
(iv) an asset that was acquired from a related party of the superannuation fund after 11 August 1999, unless the asset was business real property acquired at market value; or
(v) an asset that had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the superannuation fund since the later of:
(A) the end of 11 August 1999; and
(B) the day 3 years before the day on which the fund first acquired an interest in the company or unit trust…”
From the above Reg 13.22C (2)(e), the requirement is that the unit trust cannot have a loan. That is why this arrangement can be called ‘Non-Geared Unit Trust’ (‘NGUT’).
Other restrictions under Reg 13.22C (2)(f) include the prohibition of the unit trust from investing in shares of a company or in units of other trusts, lending money to another entity, investing in an encumbered asset (i.e. an asset with a mortgage) and acquiring an asset from a related party.
In other words, an SMSF can acquire units in a unit trust in which the other units can be owned by related parties (e.g. SMSF members). The unit trust can then acquire real properties. The key restriction is that the trust cannot borrow money for the acquisition of properties.
However, there is no restriction on the SMSF from borrowing to acquire its units in the unit trust. A practical issue is that third-party lenders may not be likely to lend money to the SMSF for the purposes of acquiring units in a unit trust without a charge (i.e. a mortgage) over the underlying property owned by the unit trust. Also, the unit trust is prohibited from conducting a business under Reg. 13.22D(1)(d). Hence, property development must be conducted in an extremely careful way.
The good thing about these arrangements is that the SMSF can acquire the remaining units from the SMSF members when it has accumulated enough cash in the future without contravening section 66 of SIS Act 1993 (Prohibition from acquiring an asset from a related party).
These arrangements would suit best to SMSFs and SMSF members who have pooled enough equity and require no borrowing for property acquisition.
Option 2: SMSF co-invests with one or more unrelated SMSF through a unit trust
For those SMSF trustees who are willing to co-invest with other unrelated SMSFs to acquire properties, an unrelated unit trust structure can be a suitable option.
To successfully apply this arrangement, the unit trust must not be considered as a related trust to avoid treatments of In-House Asset rulings. Pursuant to section 70E(2)(a), the requirement of this arrangement is that no participant SMSF can hold more than 50% of the units in the trust. This can be easily established through the documentation if all units are of the same class of units. The ATO confirmed in its ATO National Tax Liaison Group – Superannuation Sub Committee Minutes of 5 March 2013 that an SMSF holding a 50% interest does not give rise to a related trust relationship.
The other limbs in section 70E(2) which can give rise to control of a trust are:
“..b) the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); or
(c) a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust…”
In other words, the documents for unit trusts which has 50%/50% unitholding arrangement must be carefully drafted to ensure that no discretionary power is given to a specific SMSF trustee or SMSF members. For example, no casting vote should be allowed in the constitution of the corporate trustee of the unit trust.
For a safer alternative is having three unrelated SMSFs (each owning 33.33% of units) to undertake the investment.
The good thing about this structure is that the unit trust can borrow against the underlying property. Also, the ability to carry on a property development under the unit trust is accessible and will not contravene Reg. 13.22D(1)(d) for conducting a business.
Disclaimer:
This article is not legal advice, and we recommend you seek legal advice which is tailored to your own circumstances before implementing any of the above arrangements.
