Can You Develop Property in an SMSF? What Every Trustee Must Know

Property development within a Self-Managed Super Fund (SMSF) is an increasingly popular strategy for Australians looking to grow wealth for retirement — but it’s also one of the most complex and heavily scrutinised investment paths.

At OwnerDeveloper, we help investors and developers navigate these opportunities. This guide covers the key compliance risks, legal structures, and strategies to ensure your SMSF property development stays within the rules and delivers long-term value.

✅ Is Property Development Allowed in an SMSF?

Yes — property development is legal within an SMSF under the Superannuation Industry (Supervision) Act 1993 (SISA) and SIS Regulations 1994 (SISR).

However, it must be structured and documented exactly right. SMSFs are not free-for-all investment vehicles — they must be maintained for one clear objective: retirement benefits for members. This is known as the sole purpose test.

🔒 The ATO’s official position: “Property development can be a legitimate investment for SMSFs… where it complies with the SISA and SISR.” – ATO SMSFRB 2020/1

⚠️ Key Rules and Risks of Property Development in an SMSF

To avoid breaching super laws, here’s what you must consider:

1. Sole Purpose Test

The SMSF must be run only to provide retirement benefits. Any current-day benefit — even indirectly — is a breach. For example:

• Renting to a related party

• Using fund assets for private purposes

• Inflated payments to related builders

2. No Borrowing for Development

SMSFs can borrow under a Limited Recourse Borrowing Arrangement (LRBA) to acquire a single property, but:

• You cannot borrow to improve or develop that property.

• You cannot change the nature of the property while a loan is in place (e.g., build on vacant land or convert a house to a duplex).

🔁 Workaround: Wait until the loan is fully repaid, then develop. Or develop via an external structure (see below).

3. Arm’s Length Transactions

All dealings must be at market value. Non-arm’s length income (NALI) can result in tax at 45% (instead of the concessional 15% super rate).

Examples:

• Undercharging or overpaying a related party

• Leasing property at below-market rent

• Providing free services or materials

4. In-House Asset Rules

An SMSF can only hold 5% or less of its total assets in related-party investments unless specific exemptions apply (e.g., Section 13.22C unit trust).

Any breach requires corrective action within 12 months or the fund risks non-compliance.

🔁 Structures to Develop Property Inside an SMSF

Depending on your goals, risk tolerance, and related party involvement, here are some legitimate structures:

✅ Option 1: SMSF-Owned Development (No Loan)

Your SMSF can:

• Buy land directly (from an unrelated party)

• Use existing fund capital to develop (not borrowed funds)

• Engage third-party or related builders (with strict arm’s-length terms)

🚫 Cannot:

• Borrow to build

• Buy land from a related party (unless it’s business real property)

✅ Option 2: 13.22C Ungeared Unit Trust (with Related Parties)

An SMSF can invest in an ungeared trust with related parties, provided:

• No borrowing

• No business activity

• No acquiring assets from related parties (unless it’s business real property)

• No charges over assets

• No leasing to related parties (unless it’s business real property)

📌 Warning: If any of these rules are breached — even once — the SMSF investment becomes an in-house asset and may need to be unwound.

✅ Option 3: Joint Venture with Unrelated Party

A joint venture is possible where:

• Each party owns a share of the actual property (not an entity)

• Costs and profits are proportionate to ownership

• It’s not a disguised loan or service arrangement

⚠️ Be careful: If your SMSF provides funds with no control or entitlement to the asset, it may be treated as a loan to a related party.

✅ Option 4: Invest in Unrelated Property Development Entity

Your SMSF can invest in a non-related company or trust undertaking property development. This avoids in-house asset limits, but the SMSF:

• Must own <50% of the entity

• Cannot exert control over the development

• Still needs to comply with the fund’s investment strategy

📂 Choosing the Right Structure: SMSF vs. Unit Trust vs. JV

Structure	Can Borrow?	Related Parties Allowed?	Must Use Arm’s Length?	Business Real Property Allowed?
Direct SMSF	❌	Limited	✅	✅
13.22C Unit Trust	❌	✅ (Ungeared only)	✅	✅
JV (Unrelated)	✅ (by partner)	✅	✅	✅
Unrelated Unit Trust	✅	❌ (>50% control)	✅	✅

🧾 Real ATO Concerns and Penalties

According to ATO SMSFRB 2020/1, common issues that lead to breaches include:

• SMSFs entering risky developments without clear strategy or documentation

• SMSFs funding related-party ventures with no arm’s-length terms

• Trustees “running a business” within the fund (which is not allowed)

• Poor record keeping, lease agreements, or missing development contracts

💥 Penalties can include:

• 45% tax on fund income

• Loss of concessional tax treatment

• Civil or criminal penalties for trustees

• Forced sale of assets or fund wind-up

🏗️ Should You Develop Property in Your SMSF?

While property development can be done in an SMSF, it’s not for everyone.

You should consider:

• Do you fully understand the SMSF compliance rules?

• Can you fund the development without borrowing?

• Are you engaging unrelated, market-based builders and developers?

• Have you reviewed your investment strategy and trust deed?

• Have you received advice from an SMSF specialist accountant, lawyer, and financial advisor?

💬 Final Thoughts from OwnerDeveloper

At OwnerDeveloper, we’ve helped countless property investors, builders, and landowners structure compliant, profitable developments — both inside and outside of super.

If you’re thinking about developing with your SMSF, we highly recommend:

✅ Reviewing your SMSF investment strategy

✅ Seeking expert legal and tax advice

✅ Getting a feasibility assessment done before committing

✅ Avoiding shortcuts or “mates rates” that trigger breaches

Want help assessing your property development strategy?

Book a free consultation today with our SMSF-savvy development team.