Beware the pitfalls of real estate held in trusts
The tax advantages of holding property in super are the lure. Many outfits are offering a one-stop shop with the property, the mortgage and the compliance and administration of the SMSF.
There will be invitations to seminars where investors will discover the secret to doubling their retirement savings and pay next-to-nothing in tax. But be careful.
Getting the structure wrong for holding property in an SMSF will attract big penalties. The Tax Office said last year that some trustees were using their superannuation funds to invest in property without fully understanding their legal obligations, or were deliberately flouting the law.
Responsibility for an SMSF cannot be outsourced. Breaches of the law can result in a fund's trustees being disqualified and facing civil penalties of up to $220,000. The geared property is not actually held directly in the fund but in a holding trust, called a bare trust, which is a separate legal structure with the SMSF as the "beneficial owner" of the property. The correct sequencing is crucial.
It is important the SMSF is begun before signing the contract of sale for the property. The mortgage must be a special type called "limited recourse", meaning if the borrower defaults, lenders have recourse only to the property.
However, lenders usually require the SMSF members to give "personal guarantees" over the loan. That means if the lender has to sell the property and the sale proceeds do not cover the mortgage, the lender can recover the shortfall from the members of the fund.
Frequently Asked Questions about this Article…
Yes—you can hold property in an SMSF, and the tax advantages are a common reason people consider it. But it’s complex: you must use the correct legal structure, understand your ongoing legal obligations as a trustee, and be aware of potential penalties if the rules are broken.
A bare trust, also called a holding trust, is a separate legal structure that actually holds the geared property while the SMSF is the beneficial owner. It’s commonly used so the SMSF can borrow to buy property, but because it’s a separate structure the correct setup and sequencing are crucial to stay compliant.
The SMSF should be established before you sign the contract of sale for the property. Getting the sequence wrong can lead to serious compliance problems, so set up the fund first and only then enter purchase contracts.
You must use a limited recourse loan (often called a limited recourse borrowing arrangement). That means if the borrower defaults the lender’s recourse is limited to the property itself, rather than the SMSF’s other assets.
Yes. Lenders will usually require SMSF members to provide personal guarantees. That means if the lender sells the property and the proceeds don’t cover the mortgage, the lender can seek the shortfall from the SMSF members personally.
No. Responsibility for an SMSF cannot be outsourced. Trustees remain legally responsible for compliance, and outsourcing administration doesn’t remove trustee obligations or potential penalties for breaches.
Breaches can be severe: trustees may be disqualified and can face civil penalties. The article notes civil penalties can be up to $220,000, and the Tax Office has flagged trustees who invest without understanding or who deliberately flout the law.
Be cautious. The article warns that seminars claiming you can double retirement savings and pay next-to-nothing in tax are common marketing tactics. Always verify the legal and compliance implications first—don’t rely solely on promotional claims.
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