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This question comes up often, because for many business owners the most valuable property they control is the one their self-managed super fund owns, frequently the business premises. The answer is set by superannuation law, not by lender appetite.
The rules in short
- No borrowing. The Superannuation Industry (Supervision) Act prohibits an SMSF trustee from borrowing money, apart from limited exceptions.
- No charges over fund assets. The SIS Regulations prohibit a trustee from giving a charge over, or in relation to, an asset of the fund. A mortgage or a caveat supporting a loan is a charge.
- Sole purpose test. The fund must be maintained to provide retirement benefits. Supporting a member’s business is not that purpose.
- No financial assistance to members or relatives. Using fund assets to help a member or their business borrow is a form of assistance.
The one exception
A limited recourse borrowing arrangement lets a fund borrow to acquire a single acquirable asset, which is held on trust for the fund until the loan is repaid. The lender’s rights are limited to that asset. The exception does not extend to borrowing against a property the fund already owns outright to raise cash for another purpose.
What does not work
| Idea | Problem |
|---|---|
| SMSF mortgages its property to secure the company’s loan | Charge over a fund asset |
| SMSF borrows against its property and lends to the business | Prohibited borrowing, and likely a loan to a related party |
| Member gives a caveat over SMSF property | The member does not own it, and the trustee cannot charge it |
| SMSF guarantees the business loan | Exposes fund assets to the business’s debts |
What business owners use instead
- Property owned personally, including the family home, with a company borrower. See using your home as security for a business loan.
- Property in a family trust or company, as covered in can a trust borrow against property.
- Property owned by a related entity under a guarantee and third party mortgage. See borrowing against property held in a different entity.
- Commercial or investment property outside super through equity release.
Why lenders will not bend
A private lender that takes a mortgage from an SMSF in breach of the rules risks the security being challenged, and the trustee faces penalties that can far exceed the amount borrowed. A careful lender will check whether a trustee company is an SMSF trustee and stop there.
This is general information, not financial or legal advice. SMSF rules are detailed, so speak to your SMSF adviser or accountant before doing anything involving fund property.
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Get matched with a funderFAQ
What is a limited recourse borrowing arrangement?
A structure that lets an SMSF borrow to buy a single asset, held in a separate holding trust, where the lender's recourse is limited to that asset. It is for acquiring an asset, not for releasing equity from one the fund already owns.
My business rents its premises from my SMSF. Does that help?
Not as security. The lease must be on arm's length terms and the rent paid on time, but the fund's property still cannot be charged for the business's debts.
What are the penalties for getting this wrong?
The ATO can impose administrative penalties on trustees, issue directions, disqualify trustees or make the fund non-complying, which carries a heavy tax cost.