If you have ever looked at your super balance and wondered whether you could grow it faster through property development, you are not alone. Many trustees consider using an SMSF to develop property, especially if they already have experience with small projects outside super. It can seem like a smart way to build long-term wealth, but SMSF development is governed by strict rules that affect what you can build, how you fund it, and whether lenders may support the structure.
This guide outlines the key rules and risks of SMSF property development, what small-scale projects may look like, how borrowing limits your options, and how joint ventures must be structured to stay compliant. As a mortgage broker in Queensland, we often help trustees understand what lenders may allow and how to assess borrowing requirements before committing to a plan.
In the sections below, you will see how the ATO views development, what SMSFs can and cannot do, why lenders take a cautious approach, and the practical steps that help trustees explore this pathway safely.
Understanding What the ATO Allows for SMSF Property Development
Before you even think about building, renovating, or partnering with another entity, it is essential to understand how the ATO views property development inside super. SMSFs are primarily investment vehicles, and any development activity must align with that purpose.
The difference between investment and development activities
The ATO makes a clear distinction between passive investment and active property development. An SMSF is designed to hold assets that may grow in value or produce income over the long term. When a project becomes too complex, hands-on, or resembles commercial development work, the fund may be seen as running a business, which can breach superannuation law. To avoid this, most SMSFs keep any development modest and infrequent.
Common signs that a project may be drifting into business activity include:
- multiple properties under development at the same time
- repeated development projects within the SMSF
- active involvement in construction planning or project management
- arrangements that operate more like commercial development than passive investment
Why SMSFs must remain investment-focused
Every SMSF decision must support the sole purpose of providing retirement benefits. Development that becomes too hands-on or commercial can appear to prioritise short-term gains or business activity, which conflicts with superannuation law.
To stay aligned with the investment purpose, any development work should clearly sit on the investment side, be backed by independent advice, be properly documented with arm’s-length arrangements, and remain consistent with the fund’s long-term strategy. If an auditor or the ATO decides the fund is running a business, the consequences can be serious and may include losing concessional tax treatment.
When development may be considered a business
The ATO assesses the overall pattern of activity rather than a single event. A modest, one-off project funded with cash may fit within the rules, but repeated development, staged projects, or larger undertakings can indicate business activity. The risk increases when development involves borrowing for construction, land subdivision, the creation of multiple titles, significant or repeated improvements, or joint projects with related parties. These situations do not automatically breach the rules, but they often attract more scrutiny.
Construction, improvement, and substantial change rules
SMSFs are generally allowed to carry out repairs, maintenance, and certain improvements, although the rules become tighter when the property is held under an LRBA. Improvements must not fundamentally change the nature of the asset if borrowed funds were used to acquire it, and a development that transforms the property into something substantially different may breach superannuation regulations.
When the fund pays for improvements using its own cash rather than borrowed money, there is usually more flexibility, but the boundaries can still be unclear. Because the SIS Act and relevant ATO rulings do not always provide exact definitions, trustees are encouraged to obtain independent advice before making major changes.
Small-Scale Development Rules Trustees Need To Know
Many trustees consider small-scale SMSF development as a simple way to add value while staying within ATO expectations. These projects usually fit better when the fund remains investment-focused and all arm’s-length rules are followed.
What typically counts as small-scale development
Small-scale development usually refers to work that does not involve major structural change or commercial-level complexity. These projects tend to be simpler, lower risk, and easier to align with SMSF rules, especially when no borrowing is involved. When the scope stays modest, trustees are less likely to trigger SMSF compliance concerns or substantial asset changes. The more significant the alteration, the higher the chance it may fall outside what the ATO considers acceptable.
Examples of small-scale development include:
- adding a granny flat
- undertaking a moderate renovation
- replacing kitchens, bathrooms, or fixtures
- completing minor extensions
- improving landscaping or outdoor areas
Improvements versus new builds
SMSFs must distinguish between improvements and new builds because each is treated differently under superannuation and borrowing rules. Improvements may offer more flexibility, while new builds or knock-down projects often carry higher compliance risk, especially when an LRBA is in place. Lenders also tend to take a cautious approach to any changes that significantly alter the original asset.
As a general guide:
- Improvements may be allowed, depending on whether the fund borrowed to acquire the asset.
- New builds, knock-downs, or constructing new dwellings involve a higher risk because they can fundamentally change the asset.
Understanding what is permitted in practice can help reduce the risk of breaching rules, particularly if borrowed funds are involved. Trustees exploring these scenarios may benefit from reviewing the allowed SMSF property renovation rules, which outline what kinds of works might fall within acceptable limits.
Why borrowing limits development options
Under an LRBA, an SMSF can only borrow to acquire a single acquirable asset, which significantly limits development activity. Borrowed funds cannot generally be used for improvements, construction, subdivision, or any work that results in multiple titles. Because of these restrictions, most development inside an SMSF must be funded from cash rather than borrowings.
When development may breach the sole purpose test
Although increasing a property’s value can benefit the fund, development may breach the sole purpose test if it benefits a related party, involves personal use, creates value for entities connected to members, or amounts to financial assistance. Any indication that the project delivers a benefit outside retirement savings increases the likelihood of ATO scrutiny.
How Borrowing Rules Affect SMSF Development Plans
Borrowing inside an SMSF is controlled by strict LRBA rules, which limit the type and scale of development you can undertake and restrict how borrowed funds can be used. This is why development plans often need careful review before moving ahead.
LRBA restrictions on construction or changes
An LRBA allows an SMSF to borrow only for the acquisition of a single acquirable asset. Development work usually changes the asset’s characteristics, adds new structures, creates multiple assets, or requires staged drawdowns. These outcomes generally fall outside LRBA rules. Because of this, any development usually needs to be funded from the fund’s own cash reserves rather than borrowed money, or the SMSF must avoid borrowing altogether.
Why lenders may decline development proposals
Lenders often apply strict criteria to SMSF development because of regulatory risk, concerns about the asset being reclassified during the build, uncertainty around valuations for incomplete projects, and the complexity of partially constructed security. They also need confidence that the loan is secured by a single, stable asset. While some lenders may consider minor improvements, most will not finance major construction or projects that rely on progressive payments.
Loan-to-value ratio expectations
SMSF borrowing limits are usually more conservative than standard investment loans. Residential SMSF loans commonly sit around lower LVRs, commercial properties may attract even tighter limits, and many lenders require the fund to hold extra liquidity to manage ongoing expenses. These conditions help ensure the SMSF can meet its obligations without breaching superannuation rules.
Why lenders may require completed assets before final valuation
Many lenders prefer the property to be completed, stable in value, and generating income before they accept it as loan security. Partially built properties are difficult to value reliably, and the risk profile changes during construction. A completed asset provides clearer security and a more predictable valuation.
The impact of progress payments
Progress payments are standard in construction projects, but LRBA structures do not support them because the loan cannot be redrawn or varied once established. This often makes progress-payment contracts incompatible with SMSF borrowing. As a result, trustees usually need to fund construction entirely from cash or wait until completion to refinance into an LRBA, depending on lender policy.
Property Development Risks Inside an SMSF
Even small-scale development carries risks, and these risks increase inside an SMSF where liquidity, diversification, income, and documentation are reviewed each year. The fund must also show it can meet its obligations throughout the project.
Cash flow strain during construction
When a property is vacant during development, the SMSF may lose rental income for a period. Despite this, the fund must still meet its ongoing expenses, including compliance and administration costs, insurance, loan repayments where borrowing exists, and the construction expenses themselves. If the fund relies on contributions to maintain liquidity, any change to contribution caps or employment circumstances can place additional pressure on cash flow.
Liquidity requirements
An SMSF must hold enough liquid assets to meet its obligations. During development, auditors will often look at whether the project has drained cash reserves, created future commitments the fund may struggle to meet, or put ongoing expenses at risk. Reduced liquidity is one of the most common problems we see when trustees take on development work within the fund.
Compliance risks
Development work can create compliance issues if it unintentionally breaches in-house asset rules, involves related-party dealings that are not properly documented, or raises concerns about arm’s-length conditions. These issues can lead to additional scrutiny or potential tax penalties, even when trustees believed they were acting appropriately.
Financial assistance concerns
If any aspect of the development provides a benefit to a related party, the SMSF may be seen as offering financial assistance, which is prohibited under the SIS Act. This risk can arise when the development occurs on land partly owned by a related party, when related-party builders are used without proper arm’s-length evidence, or when the property is later rented by a related party. Even small oversights in these areas can create compliance problems.
The risk of being considered a development business
If the ATO sees a pattern of repeated or large-scale development activity, the fund may be viewed as carrying on a business rather than operating as a retirement savings vehicle. This can jeopardise the SMSF’s concessional tax treatment and may require the structure to be reassessed.
Joint Ventures and Related-Party Development Rules
Joint ventures can help SMSFs take part in projects that would otherwise be too large and can spread both cost and responsibility. The structure must still be precise and fully compliant to avoid related-party issues or breaches of arm’s-length requirements.
When joint ventures may be permitted
SMSFs can enter JVs when the structure aligns with superannuation law and the arrangement is clearly documented and transparent. JVs with unrelated parties generally involve fewer compliance risks because they reduce concerns around arm’s-length dealings and value transfers.
A joint venture is more likely to be acceptable when it meets conditions such as:
- operating on commercial terms
- avoiding financial assistance to related parties
- preventing any transfer of value between entities
- keeping ownership and profit-sharing clearly defined
Risks of partnering with related parties
Joint ventures with related parties attract greater scrutiny because they can involve non-arm’s-length dealings, contributions that are not valued correctly, indirect benefits to members, or control arrangements that place the SMSF at a disadvantage. To remain compliant, every contribution and decision within the JV must be documented clearly and supported by an independent assessment.
Market-value and arm’s-length requirements
All contributions made by the SMSF within a JV must be at market value, properly supported by independent valuation where required, and recorded in a way that shows no cross-subsidisation. The ATO expects clear evidence that the SMSF neither advantaged nor disadvantaged any party and that all dealings were conducted on a genuine arm’s-length basis.
Avoiding in-house asset breaches
In-house asset rules limit the SMSF’s exposure to investments involving related parties. JV arrangements must be structured carefully so the fund’s interest in any project vehicle or entity does not exceed these limits. Proper planning and documentation help ensure the SMSF stays within the permitted thresholds.
Documents lenders often need for SMSF joint ventures
Lenders generally need detailed information before considering finance for an SMSF involved in a joint venture. They look for clear evidence that the structure is compliant, commercial, and supported by proper due diligence. This allows them to assess the project’s viability and whether the proposed asset is suitable as loan security.
Lenders may request documents such as:
- Joint venture agreements
- contribution schedules
- independent valuations
- project feasibility assessments
- evidence of arm’s-length dealings
Prepare Your SMSF for a Safe, Compliant Development
Developing property inside an SMSF can be a viable way to build long-term retirement savings, but it comes with strict SMSF property rules and closer scrutiny than standard investment projects. Borrowing limits, compliance requirements, and lender expectations all shape what is possible, which is why careful planning and clear documentation are essential before moving forward.
If you’re considering a small-scale development or want to understand how borrowing rules may affect your plans, we can help unpack what lenders may allow. As an SMSF mortgage broker in Queensland, Ausfirst Lending Group can outline lending policies, compare options, and help you prepare for the early steps with confidence.
SMSF development works best when you plan ahead and stay within the rules. If you’d like to explore what your fund may be able to do, get in touch and we can guide you through the next steps.
Frequently Asked Questions (FAQs)
An SMSF may buy land, but building on it later can be difficult if you plan to use borrowing. LRBA rules only allow borrowing for a single acquirable asset, and vacant land with a future build usually does not meet that definition. If the fund pays for construction entirely from cash, some projects may be possible. We can help you check how lenders view this structure before you commit.
Selling straight after completion may raise concerns because the ATO could see it as property development for short-term gain rather than long-term investment. This might be interpreted as running a business, which risks the SMSF’s concessional tax treatment. If you are planning to sell, it is important to show that the strategy still supports retirement benefits and fits your written investment objectives.
Auditors look closely at whether the fund kept enough liquidity, followed arm’s-length arrangements, and stayed within superannuation and LRBA rules. They often check development invoices, bank statements, contracts, and evidence that no related party received a benefit. If something looks inconsistent with the investment strategy, the auditor may request extra information or adjustments.
No. SMSFs cannot use personal loans, credit cards, or external borrowings held in a member’s name to fund development. Any outside credit used for SMSF expenses is usually treated as financial assistance to the fund, which is prohibited. All development costs must come from SMSF assets or an approved LRBA structure that complies with the SIS Act.
You may use rental income from other SMSF assets, but only if the development does not strain the fund’s liquidity or breach diversification requirements. Trustees need to show that ongoing expenses, insurance, and compliance costs can still be met comfortably. As mortgage brokers in Queensland, we can help you map out expected cash flow so you can see whether the fund may handle the project safely.
