Gearing in SMSF gives trustees the ability to use borrowed funds to invest, opening the door to opportunities that might otherwise be out of reach. This approach can accelerate the growth of retirement savings, but it also brings added responsibility, greater exposure to risk, and the need for careful planning.
In this guide, Ausfirst Lending Group outlines how gearing works in a self-managed super fund, the potential benefits over the long term, the risks to be managed, and the steps to decide if it’s right for your retirement strategy. Learn how SMSF gearing strategies can help grow retirement wealth while managing risk.
How Gearing Works Inside an SMSF
Gearing inside a self-managed super fund is not the same as taking out a standard home loan. Under superannuation law, funds can only borrow under what’s called a limited recourse borrowing arrangement (LRBA).
Here’s how it works in practice:
- The SMSF sets up a separate trust to hold the asset being purchased.
- The lender provides a loan to the SMSF, but their recourse is limited to that single asset.
- This means if the SMSF defaults, the lender can’t touch other assets in the fund.
This protection is designed to safeguard members’ retirement savings while still allowing for borrowing. It’s one of the reasons lenders apply stricter criteria and often require larger deposits when financing SMSFs.
Borrowed funds can be used for residential property, commercial property, or, in some cases, managed funds and listed securities. However, there are restrictions. SMSFs cannot borrow to renovate properties significantly or to improve assets beyond their existing condition. This makes planning critical, as you need to ensure the asset is fit for long-term holding from the outset.
Learning more about the differences between SMSF loans and standard home loan structures may also help clarify why lender expectations tend to be stricter and why loan terms can vary considerably from conventional lending.
The Power of Leverage in Growing Retirement Wealth
Leverage, or borrowing to invest, gives your SMSF exposure to larger assets than it could otherwise afford. This means your returns aren’t just based on the contributions and earnings inside the fund, but on the performance of a much bigger investment.
For instance, let’s say your SMSF has $300,000 in cash. Without gearing, you can only purchase an investment worth that amount. But if you borrow $500,000 through an LRBA, you suddenly have the ability to purchase an $800,000 property.
Here’s why this matters:
- Accelerated capital growth – if property values rise, your SMSF benefits from growth on the entire $800,000, not just your original $300,000.
- Potential for stronger income – larger properties may provide higher rental yields, improving the fund’s cash flow.
- Access to higher-quality assets – gearing can give you the ability to buy in better locations or access commercial property, which might otherwise be out of reach.
Of course, leverage works both ways. If markets decline, the losses are also magnified. This is why gearing is best suited to long-term investors who can ride out volatility.
The Compounding Effect of Gearing Over Time
When you combine gearing with the power of compounding, results can snowball over the years. Compounding happens when earnings (like rent or dividends) are reinvested, generating further growth on top of previous returns.
Let’s take a geared property as an example:
- Your SMSF buys an $800,000 property with $300,000 cash and a $500,000 loan.
- Rental income helps cover the loan, while property values grow over time.
- After 15 years, the loan balance may be significantly reduced. At the same time, the property might be worth $1.2 million or more.
Because superannuation enjoys concessional tax treatment, with 15% during the accumulation phase and potentially 0% in the retirement phase, compounding becomes even more powerful. More of your returns stay in the fund, where they can keep growing.
This is why some SMSF investors see gearing as a way to turbocharge retirement savings. However, the real key is patience. Compounding is most effective when you hold assets for a decade or longer, allowing short-term volatility to smooth out.
Investment Assets Commonly Geared in SMSFs
Not every investment type is suitable for gearing inside super, and the choice of asset can shape both the risk and the return of your strategy. The most common geared assets include:
- Residential property – Appealing because it’s tangible and familiar, but lenders usually require a 20–30% deposit, and cash flow can be tight if rent falls short.
- Commercial property – Popular with small business owners who use their SMSF to buy premises and lease it back. This can provide stability and long-term control over costs.
- Listed securities – Shares and ETFs can be geared through margin lending, but volatility is higher, and many lenders are cautious about allowing this in SMSFs.
- Managed funds – Some geared managed funds offer instant diversification across asset classes. They are more liquid than property but depend heavily on the fund’s strategy.
When choosing an asset, it’s important to think beyond growth potential. Trustees should assess liquidity, diversification, income reliability, and the fund’s ability to realistically support repayments over time.
Key Risks to Consider Before Using Gearing
While gearing can boost long-term wealth, it also exposes SMSFs to risks that need to be managed carefully. Trustees should ask themselves: what could go wrong, and does the fund have the strength to withstand it?
Some of the key risks include:
1. Market downturns
A fall in asset values has a greater impact when borrowing is involved, because the loan remains unchanged even if the investment drops in value. Moderate declines can quickly erode member balances, and if the asset must be sold in a weak market, losses may be crystallised at the worst possible time.
2. Cash flow stress
Loan repayments are fixed obligations, regardless of whether the investment produces income. Vacant rental properties, lower dividends, or unexpected expenses can put pressure on the SMSF’s cash reserves, forcing trustees to rely on contributions or sell other assets to meet repayments.
3. Interest rate fluctuations
Increases in interest rates directly raise repayment costs, reducing the net return of the strategy. Even small rate rises can significantly alter affordability. SMSFs should model worst-case scenarios to ensure they can manage repayments across a range of economic conditions.
4. Liquidity issues
Superannuation law requires benefits, pensions, and expenses to be paid on time. Large, illiquid assets such as property can tie up most of the fund’s capital, making it difficult to release cash when members retire, start drawing pensions, or request lump sums.
5. Compliance risks
Borrowing arrangements must strictly follow ATO rules. If an LRBA is not correctly structured, or if the fund uses borrowed money in ways not permitted by law, trustees risk penalties and the potential loss of the fund’s concessional tax status.
These risks do not necessarily rule out gearing, but they highlight why stress testing, diversification, and contingency planning are essential.
Tax Considerations of SMSF Gearing
SMSF tax benefits are one of the main reasons trustees consider gearing. However, these advantages only apply when the rules are properly understood and managed. Some of the key considerations are:
- Interest deductibility – Interest payments on the loan may be deductible against the income earned from the asset. This can help offset costs in the early years.
- Capital gains discounts – Assets held for more than 12 months get a one-third CGT discount in super, bringing the effective tax rate on gains down to 10%.
- Depreciation deductions – Properties may offer depreciation benefits for buildings and fixtures, further lowering taxable income.
- Pension phase benefits – Once a member enters pension phase, investment income and capital gains on the pension balance may be completely tax-free.
It is also important to recognise that gearing interacts with contribution caps, pension obligations, and cash flow needs. For this reason, professional tax advice is highly recommended before committing to a borrowing strategy.
Regulatory Rules and Compliance Obligations
Because gearing increases both risk and complexity, the ATO enforces strict rules to protect members’ retirement savings. Trustees need to be across the following requirements:
- Limited recourse – Loans must be LRBAs, protecting other fund assets from lender claims.
- Trust deed permissions – The SMSF trust deed must explicitly allow borrowing. Without this, trustees cannot proceed.
- Holding trust structure – The asset needs to be placed in a separate trust and remain there until the loan is fully repaid.
- Single asset requirement – An LRBA can only be applied to a single asset or a group of identical assets, such as a parcel of shares.
- Audit and reporting – Borrowing arrangements must be documented and reported in annual audits.
Non-compliance can have serious consequences, including penalties and loss of the fund’s tax concessions. This is why many trustees engage SMSF specialists, lenders, and accountants to ensure the structure is properly set up from the start.
Who Gearing May Suit (And Who It Might Not)
Gearing in SMSF is not suitable for everyone. The decision often comes down to timeframes, contribution capacity, and risk tolerance. The table below highlights the types of trustees who may benefit from gearing, and those for whom it might not be the right fit.
| Who It May Suit | Who It Might Not Suit |
| Trustees with medium to long investment horizons (10–15+ years) | Funds with low balances where one geared property could dominate the portfolio |
| Members who maintain consistent contributions and can comfortably manage loan repayments | Trustees approaching retirement who may not have time to recover from volatility |
| Investors seeking exposure to higher-value assets such as commercial property | Members without a steady contribution capacity |
| Trustees with strong risk tolerance and a willingness to ride out downturns |
Strategies to Manage Risk When Gearing in an SMSF
If you’re considering gearing, having a clear plan to manage its risks is essential. This means thinking ahead about how the SMSF would handle unexpected changes in income, interest rates, or market conditions. Practical SMSF gearing strategies include:
- Maintain liquidity buffers – keep cash reserves to cover vacancies or unexpected costs.
- Diversify the portfolio – avoid relying on one property by balancing with other assets.
- Stress test repayments – model higher interest rates to check the fund can cope.
- Choose investments carefully – prioritise assets with stable income.
- Review loan terms regularly – monitor refinancing options and rate changes.
- Plan an exit strategy – decide early whether to sell, refinance, or restructure if conditions change.
Practical Steps to Get Started With SMSF Gearing
If gearing is the right fit for your SMSF, move through the process carefully and methodically. Each step may help ensure SMSF compliance and improves the chance of success.
1. Check your trust deed
Confirm that your SMSF trust deed specifically allows borrowing under a limited recourse borrowing arrangement. If this clause is missing, the deed will need to be amended before any borrowing can occur. Making this the first step helps avoid costly delays or compliance issues later.
2. Assess your fund’s balance
Consider whether your SMSF has enough capital to support the geared SMSF property investment as well as maintain diversification across other assets. Relying too heavily on a single property or security can expose the fund to avoidable risk. It’s important to ensure there are adequate reserves for liquidity and future member benefits.
3. Engage professionals
Work with a licensed financial adviser, SMSF accountant, and potentially a specialist mortgage broker experienced in SMSF lending. Their combined expertise helps ensure the strategy is structured correctly, remains tax-efficient, and aligns with your long-term retirement objectives.
4. Compare lenders
Not all banks and lenders offer SMSF loan products, and those that do can apply very different lending rules. Comparing options will give you clarity on SMSF loan deposit requirements, allowable assets, interest rates, and repayment structures. This step also helps identify lenders who are comfortable with the type of investment you intend to purchase.
5. Set up the holding trust
The asset being acquired must be legally placed in a separate bare trust, with the SMSF listed as the beneficial owner. This requirement is a cornerstone of LRBA compliance under ATO rules. Setting up the trust correctly at the start avoids complex legal and tax problems down the track.
6. Develop monitoring systems
Create a process for regularly tracking SMSF loan repayments, rental or dividend income, liquidity buffers, and compliance obligations. This may include scheduled reviews with your accountant or adviser. Ongoing monitoring ensures the strategy remains sustainable, responsive to market changes, and protective of member benefits.
Getting the setup right from the start is crucial to keeping your SMSF strategy on track. Speak with an SMSF mortgage broker to secure the right loan and keep your fund compliant.
Balancing Opportunity With Responsibility
Using gearing to maximise returns in an SMSF can be a powerful strategy. The combination of leverage, compounding, and concessional tax treatment has the potential to accelerate retirement wealth. But gearing is not a shortcut. It requires discipline, careful structuring, and an acceptance of risk.
If you’re considering gearing in your SMSF, take the time to explore your options, stress test your assumptions, and seek professional advice. The right setup could help you achieve your retirement goals faster, but the wrong one could set you back.
Speak with Ausfirst Lending Group today to explore whether SMSF gearing is the right step for your retirement strategy.
Frequently Asked Questions (FAQs)
Vacancies can create real stress, because loan repayments must still be met. Trustees may need to rely on contributions or dip into cash reserves to cover the shortfall. Having a buffer of at least 6–12 months of loan repayments set aside is often recommended to manage these risks without scrambling.
Yes, gearing into equities is possible and can offer more flexibility and liquidity compared to property. However, margin lending within SMSFs is less common and available products are limited. It’s important to weigh the higher volatility of shares against the stability of property and to get professional advice to check whether this strategy suits your fund’s risk profile.
Super law requires pensions to be paid, even if the fund’s money is tied up in a property. If liquidity is tight, the SMSF may be forced to sell or restructure the geared asset earlier than planned. Careful cash flow planning helps avoid forced sales.
Residential property often has tighter loan-to-value ratios and less flexibility, while commercial property can allow higher gearing and may be leased back to your own business. Both are subject to SMSF borrowing rules, but lenders generally view commercial as lower risk for SMSFs because rental income is often more predictable.
Not major ones. SMSFs cannot borrow to improve or substantially change an asset, only to maintain or repair it. Adding a new bedroom is not allowed, but replacing a damaged roof or repainting is usually fine. Any borrowing for prohibited improvements could breach ATO rules and put the fund’s compliance at risk.
