Why an SMSF Cannot Acquire a Residential Duplex from Its Member?

When clients consider property development alongside superannuation strategies, it is common for questions to arise about whether a Self-Managed Super Fund (SMSF) can purchase newly developed property from its members.

One recent example involves a client planning to build two duplexes, intending to sell:

• one duplex to the public, and

• one duplex to his own SMSF, with a corporate trustee controlled by him and his wife (both members of the SMSF).

The further proposal was that another company he controls would lease the property for business purposes. At first glance, this might appear commercially sensible. However, there are serious compliance barriers under the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Core Restriction: Section 66 SIS Act

Section 66 of the SIS Act strictly prohibits an SMSF from acquiring assets from a member or a related party. The only exceptions are specific categories of assets, including:

• listed securities,

• widely held trusts, and

• business real property (BRP).

For property, the only relevant exemption here would be if the duplex qualifies as business real property.

Business Real Property Definition

Under section 66(5), business real property means land and buildings “used wholly and exclusively in a business.”

This test is strict: the use of the property, not just its zoning or design, determines whether it qualifies.

A residential property will ordinarily not qualify as business real property, even if leased to a related entity.

The only exception is where the property is genuinely and exclusively used for carrying on a business (for example, a medical practice operating in a converted house).

ATO guidance SMSFR 2009/1 provides further clarity:

• Paragraph 171: Land development activities often occur in the course of a business, involving physical development and sale.

• Paragraph 172: But land development can also be undertaken as an investment activity, in which case it does not meet the business real property definition.

• Paragraph 173: Land in development may meet the BRP definition only if it is being developed as part of a land development business, subject to the “wholly and exclusively” test.

ATO Example 37 in the ruling illustrates where land acquired in a genuine land development business may be BRP.

In-House Asset Considerations

Even if the SMSF were permitted to acquire the duplex, leasing it to a related company would trigger the in-house asset rules:

• A property leased to a related party is an in-house asset unless it is BRP.

• In-house assets are capped at 5% of the total SMSF assets.

  
  

Thus, unless the duplex qualifies as BRP, the fund would breach this limit.

The proposed arrangement to sell a residential duplex to the client’s SMSF is non-compliant with the SIS Act. The only pathway would be if the duplex clearly met the business real property exemption, which is highly unlikely in the context of standard residential development and leasing.

Attempting such a transaction could expose the SMSF to:

• regulatory contraventions,

• significant penalties for trustees, and

• the potential loss of the fund’s complying status.

For these reasons, the safer course is for the SMSF to explore alternative, compliant investment strategies that still align with the client’s long-term goals.

This scenario illustrates a common misunderstanding: that SMSFs can be integrated into personal property development projects. In practice, the SIS Act and ATO guidance draw a very hard line. Unless the property qualifies as business real property, related-party transactions are prohibited. I would strongly advise steering the client towards alternative structures — such as unit trusts or arm’s-length arrangements — rather than risking compliance breaches.