How to develop property with borrowings in your SMSF

Using a Limited Recourse Borrowing Arrangement (LRBA) to invest in property via your SMSF is one thing, but using borrowings to finance property development is something else altogether.

Whilst the current rules (stated in section 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act)) allow you to finance a property in your SMSF, they do not allow you to change the nature and character of the property. In other words, the property can’t become a different asset. Clearly then, developing a property would be a breach of section 67A and 67B.

Regardless of this however, property development within your SMSF is still possible.

In 2000, the SIS Act was amended to include a number of new regulations (SIS Regulations (SISR)). Specifically, SISR 13.22C allows a super fund to enter into a LRBA with an ungeared unit trust (known as a SISR 13.22C unit trust). By doing this, you are able to undertake property development within your SMSF with borrowed funds. It is important to note that this is only possible because the rules under section 67B of the SIS Act do not extend to a SISR 13.22C unit trust.

Here’s an overview of how it all works.

There are 5 parties involved; the lender, your SMSF and its trustees, a holding trust, a 13.22C unit trust and the vendor.

Firstly, the SMSF needs to source borrowings for the project. This could be arranged with a financial institution or a related party to the SMSF (e.g. a fund trustee could borrow against the equity in their home and then on-lend the funds to the SMSF).

In the case where funds are borrowed from a financial institution, the security for the borrowings will be the units in the unit trust. This is because it is the unit trust that acquires the property and undertakes the development, not the SMSF.

Therefore, once the SMSF has arranged the borrowings, it then directs them (plus any existing SMSF funds to be used for the project) to the unit trust for the purchase and development.

Until the loan is repaid, the units in the unit trust are held on trust by the trustee of the holding trust on behalf of the SMSF. When the loan is repaid, the units in the unit trust are transferred from the holding trust to the SMSF. The end result is that the SMSF owns all the units in the unit trust which owns the completed property (or properties).

At this stage, the trustees of the SMSF can then decide whether they retain all the units in the unit trust or sell them. It should be mentioned that a partial sell-off of the units is not possible, all units must either be retained or sold.

Please note that the above is a brief overview of a highly complicated SMSF strategy. This strategy is not for everyone and there are numerous issues to consider that have not been raised here. If you are contemplating property development in your SMSF, we’d strongly recommend obtaining advice from a specialist SMSF adviser first.


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.