Common SMSF Borrowing Mistakes
Borrowing through an SMSF can look straightforward at first.
But this is where many people get caught.
SMSF borrowing doesn’t work like a standard property loan. It follows a specific structure under a Limited Recourse Borrowing Arrangement (LRBA), and that structure needs to be set up properly from the beginning.
Most issues we see don’t come from big decisions.
They come from small things early on that weren’t handled correctly.
This guide walks you through the most common SMSF borrowing mistakes, so you know what to look out for before you get started.
1. Setting up the structure too late
This is probably the most common issue.
With SMSF borrowing, the structure needs to be in place before you sign the contract.
That includes:
your SMSF
the holding trust
the correct purchaser name
Trying to fix this afterwards can create legal and compliance issues that are not easy to unwind.
2. Getting the holding trust wrong
The holding trust is not optional.
It’s a required part of the structure.
Where things usually go wrong:
setting it up after the purchase
using incorrect trustee details
documents not matching the contract
If this part isn’t right, the ownership structure itself may not comply.
3. Incorrect purchaser name on the contract
This sounds small, but it’s one of the most common issues.
The name on the contract needs to match the structure exactly.
We often see:
the SMSF listed instead of the holding trustee
incorrect wording
inconsistencies across documents
Once the contract is signed, fixing this can be costly and time-consuming.
4. Loan terms not reflecting market conditions
SMSF loans need to be set up on commercial terms.
This includes:
interest rate
repayment schedule
overall loan conditions
If they don’t reflect market conditions, it can create tax issues, including non-arm’s length income (NALI).
5. Treating it like a normal home loan
This is where expectations don’t match reality.
SMSF borrowing is not a flexible loan structure.
It’s a defined legal arrangement.
Common assumptions we see:
thinking the structure can be adjusted later
expecting the same flexibility as a standard mortgage
overlooking compliance requirements
This is where a lot of mistakes begin.
6. Documentation not aligned
There are multiple documents involved in an SMSF borrowing structure.
They all need to align.
Common issues include:
missing documents
inconsistent details
incomplete trustee resolutions
These often come up during audits, when they are harder to fix.
7. Investment strategy doesn’t match the decision
Before borrowing, your SMSF needs a documented investment strategy.
This should reflect what you’re actually doing.
Where things go wrong:
treating it as a formality
not updating it for property investment
not considering cash flow for repayments
The strategy needs to support the decision, not sit separately from it.
8. Using the property incorrectly
If your SMSF is buying residential property:
you can’t live in it
related parties can’t use it
it must be held purely for investment
Using it for personal benefit can breach the sole purpose requirement.
9. Making changes to the property under the loan
There are limits on what you can do to the asset while the loan is in place.
For example:
major renovations
redevelopment
changing the nature of the property
These can create issues if not handled properly.
10. Focusing only on the purchase
This is something many people underestimate.
SMSF borrowing doesn’t end at settlement.
You still need to:
maintain records
keep everything compliant
arrange annual audits
lodge SMSF returns
The structure needs to be maintained, not just set up.
Why these mistakes matter
Most of these issues don’t show up immediately.
They tend to surface later.
This can lead to:
delays
additional costs
tax consequences
compliance risks
The good news is that most of them are avoidable when the structure is set up properly from the start.
How we can help
We focus on SMSF setup and compliance.
This includes:
preparing SMSF borrowing documentation
setting up LRBA and holding trust structures
making sure everything aligns before the transaction
supporting ongoing compliance and reporting
If you’d like to understand what this would look like in your situation, you can speak with our team.
Ruby He
Ruby He is the founder of Real Accounting, a specialist firm focused on SMSF setup and SMSF Setup and Compliance.
With years of experience working with business owners and investors, she helps clients navigate SMSF structures with clarity, ensuring compliance while unlocking opportunities to invest in property through super.
Ruby is known for her practical, no-nonsense approach, simplifying complex regulations into clear, actionable steps. Clients value her guidance in structuring SMSFs correctly and her track record of supporting successful property investments within super.
Thinking of using your super to invest in property? Have a chat with Real Accounting.
Disclaimer
Real Accounting does not hold an Australian Financial Services Licence (AFSL) and does not provide financial product advice.
This article contains general information only and does not take into account your objectives, financial situation, or needs.
Before establishing an SMSF or implementing any borrowing arrangement, you may wish to seek advice from a licensed financial adviser to assess whether it is appropriate for your circumstances.