Purchasing an SMSF Real Property from a related party

Written by: Emily Coetzee

Self-managed superfunds (SMSFs) are generally prohibited from purchasing property from a related party however, there are a few exceptions to this rule. This article explores the commercial property exception and its strict conditions.

When purchasing a property in an SMSF capacity (including from a related party), care needs to be taken to ensure compliance with the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). A breach of the SIS Act can incur administrative penalties imposed against the individual trustees or corporate directors (if the trustee is a company) and is applicable to each breach. It could also compromise the SMSF’s concessional rate position, and lead to the imposition of the highest marginal tax rate.

For an SMSF to legitimately purchase a property from a related party, there are a number of requirements that must be met to comply with the SIS Act.

Who is a related party?

A related party can be identified as one of the following:

• An SMSF member – a listed person whose superannuation is being held within the superfund
• A relative of an SMSF member – a spouse, child, parent, sibling etc
• A company or a trust that is operated or controlled by an SMSF member or an associate of a member
• An employer sponsor that makes contributions to the SMSF

If the seller of a property can be categorised as one of the above, the SMSF must take care to meet the following requirements:

Business Real Property

The first is that the property must qualify as a ‘business real property’ under s 66 of the SIS Act. Clause 5 of the section defines the term as:

 (a)  any freehold or leasehold interest of the entity in real property; or

 (b)  any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

 (c)  if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph–any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

Some examples of commercial properties that could be purchased include warehouses, offices and farmland being utilised by a farming business. The purchase of residential property is excluded from this exception. It is also worth noting that as of 10 August 2026, SMSFs are no longer permitted to borrow money to purchase residential property. [1]

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[1] This change was made via Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Cth) which passed Parliament on 26 June 2026.

‘Arm’s Length’ Transaction

Secondly, the transaction must be completed at an ‘arm’s length’. This means the purchase must occur between separate and independent parties without preferential treatment. Further, the purchase price must be assessed independently and at market value. To ensure this requirement is met, the property must be purchased, sold and leased at the true market rate. This is to ensure that the members of an SMSF cannot use the fund’s assets to procure a financial discount for themselves or a relative, in contravention of s 65(1) of the SIS Act.

Limited Recourse Borrowing Arrangement

If the SMSF is borrowing money to purchase a property, a Limited Recourse Borrowing Arrangement (LRBA) must be set up to establish the borrowing structure. An LRBA is the vehicle by which an SMSF borrows money to purchase the property under s 67A of the SIS Act. The LRBA must be in existence either before or at the time of purchase, depending upon each state and territory’s requirements, to ensure that the bare trustee (also known as the custodian) is the purchaser from settlement.

Each state and territory’s requirements are set out as follows:

State/Territory	Date of establishment
NSW	After the contract of sale is signed
VIC	After the contract is signed and prior to settlement
QLD	Before or on the date the contract is signed
ACT	After the contract of sale is signed
WA	Before or on the date the contract is signed
SA	After the contract is signed and prior to settlement
NT	Before the contract is signed
TAS	After the contract of sale is signed

The custodian will be listed on the contract of sale as the purchaser, and the property will transfer to the custodian upon settlement. The custodian will then hold the property as trustee for the SMSF until the loan is fully repaid. It is important to note that the SMSF retains the beneficial ownership of the property, in that it receives the rental income and pays any applicable expenses. Only once the loan is repaid may the title be transferred to the SMSF trustee.

If borrowing is not required, the SMSF can purchase the property outright using its own funds. In this instance, the SMSF is listed as the purchaser and the property transfers to the SMSF upon settlement without the need for a custodian.

[1] This change was made via Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Cth) which passed Parliament on 26 June 2026.

Single Acquirable Asset

A general requirement for SMSF purchases is that the property must be considered a ‘single acquirable asset’. This means that it must be one piece of property or if it encompasses multiple items, it cannot be sold separately. Ordinarily this takes the form of a building and land, as the building cannot be purchased without the land that it is affixed to. This can also extend to an office or warehouse with an allocated car space which are on separate titles but are still considered to be one property as they are legally tied together.

Sole Purpose Test

A further and final general requirement is that the purchase of the property must meet the ‘sole purpose test’. The property purchase must be for the sole purpose of providing retirement benefits to the members of the SMSF. This principle goes hand in hand with the arm’s length threshold, prohibiting a purchase for personal use and renting the property to a related party.

Conclusion

It is generally advised to avoid purchasing property from a related party through an SMSF, however if the requirements set out above are met, an SMSF can effectively avoid breaching the rules of the SIS Act.