“Should we use all of our super to buy a property – or borrow within the SMSF so we keep a cash and investment buffer?”

That was the question a couple on the Sunshine Coast asked when exploring an SMSF property strategy. They were comfortable with real estate, didn’t love shares, and wanted a plan that could scale into retirement without leaving them short on liquidity. We compared two pathways – All‑Cash vs Borrowing in the SMSF (LRBA) – and the difference surprised them.

The Two Options at a Glance

Fund snapshot (illustrative only):

• SMSF balance: $600,000
• Target investment property: $600,000 + costs
• Member contributions and rental income flow inside the fund, where earnings are generally taxed at 15% in accumulation phase and can be tax‑free in retirement phase.

Option A – All‑Cash Purchase

• The SMSF pays the entire purchase price and costs from cash.
• Pros: Simple structure; no loan costs; fewer third‑parties; easy admin.
• Trade‑offs: The fund’s liquidity and diversification collapse to a single asset. There’s limited cash to manage vacancies, maintenance, or insurance. If the trustees later need to start a pension, the fund may lack liquidity for pension payments without selling the property at an awkward time.

Option B – Borrowing Inside Super (LRBA)

• The SMSF uses a Limited Recourse Borrowing Arrangement (LRBA): the fund contributes the deposit and costs, and a specialist SMSF lender provides the balance. The property sits in a holding (bare) trust and rent/expenses flow within the fund.
• Pros:
  • Preserves liquidity and diversification: You don’t deplete the entire fund – cash and other investments can remain in the SMSF, improving resilience and allowing ongoing rebalancing.
  • Tax treatment stays inside super: Net rent is taxed at 15%, not personal marginal rates. If the property is eventually sold after retirement or at age 65 while supporting a retirement‑phase pension, earnings (including realised gains) can be taxed at 0% within the fund (subject to transfer balance cap and proportioning rules).
  • Contributions help service the loan: Ongoing contributions can assist cash flow inside the fund.
• Trade‑offs:
  • Higher loan rates and strict compliance (LRBA deeds, bare trust, sole‑purpose test).
  • Cash‑flow management becomes critical (vacancy, repairs, interest rate rises). Buffers and insurance remain essential.

Why the Couple Chose to Borrow Inside Super

1. They Kept a Safety Buffer
   With borrowing at around 60% LVR, their SMSF used roughly $270 – $300k for deposit, costs and buffer – not the full $600k. The remaining cash stayed invested across liquid assets to smooth the ride, fund insurance premiums, and provide an emergency buffer if the property was vacant.

2. They Stayed Diversified
   All‑cash would have concentrated them into one property. The LRBA approach meant they still held a diversified portfolio alongside the property, allowing rebalancing and tactical changes over time.

3. They Valued the Tax Pathway

• During work years: Rent taxed at 15% inside the SMSF versus much higher personal rates outside super for many people.
• At retirement (or 65+): When their fund moves to retirement phase, earnings on assets supporting the pension can be tax‑free, giving a clear exit strategy for potentially 0% CGT on sale in pension phase.

What Changed Their Minds About Shares

Initially, the couple wanted “property only.” After a short education session, they saw how a small, rules‑based allocation to diversified share funds inside super could complement an SMSF property – not replace it. We walked through:

• Purpose‑built diversification: Keeping part of the fund in a low‑cost, broadly diversified share portfolio gives exposure to thousands of companies and sectors the single property can’t cover, reducing concentration risk and allowing rebalancing over time.
• Liquidity for “what‑ifs” and pensions later: Market assets can be bought or sold in small parcels to pay expenses or, later on, to fund retirement‑phase pension payments without being forced to sell a property at the wrong time.
• Tax setting remains favourable inside super: While invested within the SMSF, income and gains are taxed at 15%/10% in accumulation, and earnings on assets supporting a retirement‑phase pension can be tax‑free.

With that context, they decided to borrow inside super for the property (preserving cash) and keep a measured allocation to diversified shares. We set rebalancing guidelines and automated regular contributions so new money is invested steadily while staying aligned to their strategy.

Why This Beats a 100% Cash Purchase

An all‑cash property would have concentrated the SMSF into a single asset and drained liquidity. The LRBA path kept a buffer, maintained diversification, and provided a clear tax pathway toward retirement – benefits the all‑cash route couldn’t match.

Guardrails and “Gotchas” (Read This Before You Act)

• You cannot live in it or rent to related parties (for residential property). It must satisfy the sole‑purpose test and the fund’s written investment strategy.
• Borrowing must be via a compliant LRBA with a separate holding (bare) trust and limited recourse to the property. Get specialist legal documents and an experienced broker because major banks often won’t lend to SMSFs.
• Liquidity matters: even with leverage, keep cash reserves for levies, maintenance, insurance, loan covenants, and (later) pension payments.

Quick Checklist if You’re Considering an LRBA

1. Feasibility and strategy: Confirm the SMSF investment strategy supports direct property and leverage; model buffers and worst‑case cash‑flows.
2. Structure: Set up bare trust/holding trust and LRBA documents correctly.
3. Lender and broker: Speak to an SMSF‑experienced broker; expect lender policy nuances.
4. Exit map: Plan the retirement‑phase transition so a future sale could occur under 0% earnings/CGT within the pension proportion (subject to the transfer balance cap and proportioning rules).

Conclusion

For this couple, borrowing inside super delivered a stronger overall position: kept liquidity, maintained diversification, leveraged 15% tax on rent during working years and a 0% earnings pathway in retirement – without consuming the entire fund balance in one purchase. After a little education, they also embraced a modest allocation to diversified shares, giving them true diversification and liquidity – advantages a 100% cash property purchase simply couldn’t provide.

Could this be a suitable scenario for you? Book a free strategy call to explore your options.

Important Information

This article is general information only and does not consider your objectives, financial situation or needs. Super and tax rules change over time. Seek personalised financial and tax advice before acting.