Unlocking Growth: The Advantages of Using Leverage to Purchase Property in an SMSF

Leverage is a powerful tool when used strategically within an SMSF, allowing trustees to build wealth, diversify their portfolio, and make the most of the tax benefits superannuation offers.

Investing in property through a Self-Managed Super Fund (SMSF) has become an increasingly popular strategy for Australians looking to take control of their retirement savings. One of the most powerful tools available within this structure is leverage—using borrowed funds to purchase assets. While borrowing within an SMSF must be done under strict conditions via a Limited Recourse Borrowing Arrangement (LRBA), the potential benefits can be significant when used correctly.

This article outlines the key advantages of using leverage to invest in property through an SMSF, and why it may be a compelling strategy for long-term wealth creation.

1. Amplifying Capital Growth Potential

The primary benefit of leverage in any investment context is the ability to amplify returns. In an SMSF, this principle applies particularly well to property investment. By borrowing to fund a property purchase, the SMSF can control a more valuable asset than it could otherwise afford using only available superannuation savings.

Example:

If your SMSF has $315,000 in available funds, is supported by other average income like your SGC contributions, it could potentially borrow an additional $560,000 through an LRBA to purchase a $800,000 investment property. Rather than being limited to the returns on a $315,000 asset, the fund gains exposure to the growth and rental income of a much larger investment.

Over time, if the property appreciates in value (e.g., from $800,000 to $1,000,000), the gains are realised on the full value of the asset—not just the SMSF's initial contribution—thereby enhancing the fund's net asset base significantly. This is the power of leverage. And remember, the starting balnce of the fund can be a the combined superannuation of up to 6 fund members.

2. Tax Efficiency and Concessional Rates

Another key advantage of using leverage in an SMSF relates to the tax-effective environment in which SMSFs operate:

• Rental income generated by the investment property is generally taxed at only 15% while the SMSF is in accumulation phase.

• Once the SMSF enters pension phase, that income (and capital gains) can become entirely tax-free.

• Capital gains from selling a property held for more than 12 months are taxed at an effective rate of 10% during the accumulation phase.

When you combine this concessional tax treatment with the ability to earn income and capital gains on a larger leveraged asset, the tax benefits compound substantially over time.

3. Building Wealth Without Requiring Additional Super Contributions

Most Australians are limited in the amount they can contribute to their superannuation each year due to contribution caps. Leverage allows an SMSF to increase its investment exposure and potentially grow its asset base faster—without relying solely on contributions.

By borrowing to purchase property, the SMSF is using its existing resources more efficiently and accelerating the growth of retirement savings without breaching contribution limits.

4. Asset Control and Diversification

Using leverage allows SMSF trustees to control a high-value tangible asset like residential or commercial property, which can provide both income and growth. This can serve as a solid counterbalance to other superannuation assets like equities or fixed interest, helping diversify the SMSF portfolio.

Commercial property, in particular, is often used by business owners who lease the premises back from their SMSF, creating a strategic synergy between personal business and retirement savings—provided it complies with ATO rules.

5. Protecting Other Fund Assets – Limited Recourse Structure

An LRBA is a specialised borrowing arrangement that ensures only the property being acquired is used as security for the loan. This means that if the SMSF defaults on the loan, the lender’s rights are limited to the property itself—not the other assets within the fund.

This feature provides a layer of protection and helps manage risk, allowing SMSF trustees to confidently use leverage without jeopardising the entire superannuation balance.

6. Accelerated Retirement Planning

Because the SMSF earns income on the full value of the property (not just the portion it paid for outright), leveraged property can produce higher long-term returns, helping the fund grow faster than it would have otherwise.

As rental income helps service the loan and capital growth accrues over time, the fund can potentially repay the loan before retirement. Once the loan is repaid and the SMSF enters pension phase, the property can generate tax-free income, providing an ongoing income stream in retirement.

7. Potential to Use Rental Income to Service the Loan

Unlike other forms of borrowing, an investment property purchased through an SMSF typically generates rental income, which can be used to help cover the loan repayments. In many cases, especially with commercial property, the rental income is stable and sufficient to meet most or all of the loan costs, reducing the reliance on fund contributions.

Important Considerations and Compliance

While the benefits of using leverage in an SMSF are substantial, trustees must understand the compliance requirements and risks involved:

• LRBAs must be structured correctly and used to acquire a single acquirable asset.

• The property must meet the sole purpose test—that is, it must be used to provide retirement benefits to fund members.

• Residential property purchased through an SMSF cannot be lived in by members or related parties, even after retirement unless it is transferred out of the fund through an in-specie transfer.

• Loans must be commercially structured, and lenders typically require larger deposits and shorter loan terms than standard home loans.

It’s also important to consider liquidity—if the property is the SMSF’s major asset, this may limit the fund’s ability to pay pensions or meet unexpected costs.

How a Mortgage Broker Can Help Leverage property in SMSF

Leveraging within an SMSF is not something to undertake without professional guidance. An experienced mortgage broker with SMSF expertise can:

• Connect you with lenders that offer SMSF-compliant loan products.

• Help structure the loan within LRBA rules.

• Work with your accountant or financial adviser to ensure that the property fits your SMSF’s investment strategy and complies with superannuation law.

  
  

Final Thoughts

Leverage is a powerful tool when used strategically within an SMSF, allowing trustees to build wealth, diversify their portfolio, and make the most of the tax benefits superannuation offers. While it adds complexity and must be handled carefully, the advantages of using borrowed funds to invest in property can significantly enhance retirement outcomes for savvy investors. Always seek the advice of trusted professionals experinced in SMSF regulations and laws.

If you're considering leveraging property within your SMSF, speak to an experienced mortgage broker or SMSF adviser who understands the unique requirements of these arrangements. With the right team and strategy, you can unlock the full potential of your superannuation through smart, tax-effective property investment.

This information is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider seeking independent financial advice from a trustted profressional before making any financial decisions.