Wealth building through an SMSF property portfolio

The self-managed superannuation fund (SMSF) sector continues to experience strong growth as more Australians look to take direct control of their retirement savings. According to the latest ATO data, there are now over 646,000 SMSFs in Australia, comprising 1.2 million members. More than 20,000 new funds were established between June and December 2024 alone, with property, both residential and commercial, emerging as an increasingly popular investment choice.

Happy older couple standing at window with mugs

Between June 2021 and June 2024, the amount of SMSF-held residential properties rose by 26.4 per cent to $55.2 billion, while commercial property grew by 25 per cent to $102 billion. This growth has been fuelled by declining setup costs and increasingly flexible lending terms, including higher loan-to-value ratios and the consideration of future super contributions, making property investment accessible to those with a starting balance as low as $250,000.

SMSF property investment rules and strategy

Both commercial and residential property can be purchased within an SMSF with both offering excellent potential for capital growth. To invest in property through an SMSF, trustees must ensure strict compliance with the sole purpose test, meaning the asset must be held exclusively to provide retirement benefits to fund members.

Residential property rules:

Cannot be purchased from or leased to a related party, even at market rates.
Members and their relatives cannot live in the property, regardless of rent paid.
Must be purchased on a commercial, arm's-length basis.

Commercial property rules:

Can be purchased from a related party, provided it qualifies as dedicated business real estate.
Can be leased to a related party, such as the trustee's business, if done on commercial terms.
Lease agreements must be properly documented, rent paid on time and reviewed regularly.

For both residential and commercial properties, an SMSF can use a Limited Recourse Borrowing Arrangement (LRBA) to acquire a higher-value asset.

Under an LRBA, the lender's recourse is limited to the specific asset purchased, thereby protecting the SMSF's other assets.

While some lenders may require personal guarantees from fund members or related parties, this does not extend the lender's rights to other SMSF assets, though the guarantor may have personal liability.

Why depreciation matters inside an SMSF

Tax depreciation refers to the wear and tear on an income-producing property and the assets within it over time. Within an SMSF, depreciation deductions reduce the fund's taxable income, which is typically taxed at 15 per cent in the accumulation phase.

To qualify for the zero per cent tax rate on income and capital gains, an SMSF member must have retired after reaching preservation age or turned 65 and the fund must be paying a retirement phase pension, within the transfer balance cap of $2 million as of 2025/2026. Otherwise, the fund remains in the accumulation phase and pays 15 per cent tax on all earnings.

Consider an SMSF with $300,000 in super available to use as leverage to purchase a $1 million commercial property. Not only does the fund benefit from capital growth on the entire asset value, but if the depreciation schedule allows for $30,000 in annual tax deductions, this equates to a $4,500 tax saving per year, while in the accumulation phase. These savings can be redirected into loan repayments or reinvested within the fund.

Depreciation can also help offset rising tax burdens. It is proposed that as of 1 July 2025, earnings on super balances over $3 million will be taxed at 30 per cent, including unrealised capital gains under Division 296. For SMSFs with large property holdings, this makes accurate depreciation reporting and proactive cash flow management even more important.

Compliance, risk and the importance of professional advice

Non-compliance with SMSF property rules, such as leasing a residential asset to a related party or failing to transact at arm's length, can expose trustees to substantial risks, including loss of concessional tax treatment, administrative penalties and potential fund disqualification. It is essential to seek professional SMSF advice before acquiring or managing property within the fund structure.

When a property portfolio is strategically structured and depreciation is maximised, it can significantly strengthen the fund's long-term financial performance. Whether acquiring a commercial asset for business use or adding a residential investment to the portfolio, depreciation should be embedded into the SMSF strategy. Engaging a qualified quantity surveyor and SMSF adviser is critical to maintaining compliance and unlocking the full financial benefit of the property.

For further advice on property investment within an SMSF contact BMT Tax Depreciation on 1300 268 628 or Request a Quote.