Deposit Bonds & SMSFs: A Hot Market, A Cold Compliance Shock

Deposit Bonds & SMSFs — A Hot Market, A Cold Compliance Shock

By David Saul
CEO & Managing Director, Saul SMSF
Independent SMSF Auditors – “SMSF Audits Well Solved”

The New Trend Emerging in SMSF Property Purchases

Australia’s property market remains one of the most competitive in the world.
With scarcity driving prices higher, we’re now seeing SMSF trustees turn to deposit bonds — a creative way to secure a property today and settle later under a Limited Recourse Borrowing Arrangement (LRBA).

At Saul SMSF, we’ve begun seeing this strategy appear in audits — and while it may seem innovative, it’s also fraught with compliance risk under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) and Regulations.

Before any trustee signs on the dotted line, they need to know exactly what they’re getting into.

What Is a Deposit Bond?

A deposit bond is not cash — it’s a guarantee from a bank or insurer that promises to pay the vendor (usually 5–10 per cent of the property price) if the buyer fails to complete the purchase.
It’s a temporary substitute for a cash deposit — ideal when liquidity is pending or rollovers are in transit.

For SMSFs, that can sound like a neat solution.
In practice, it’s a compliance minefield.

Why It Matters Under the SIS Act

Sections 67, 67A and 67B of the SIS Act strictly regulate SMSF borrowing.
They allow trustees to borrow only under a Limited Recourse Borrowing Arrangement — and prohibit the fund from giving any charge or security over its assets.

So if a deposit bond:

• Is secured by fund assets, or
• Involves a member’s personal guarantee that exposes fund assets,

then the SMSF may have breached the borrowing provisions — triggering an audit qualification and a reportable contravention to the ATO.

This is not a minor technical breach — it’s a serious compliance failure that can jeopardise the fund’s concessional tax status.

Common Real-World Scenarios

1️⃣ Liquidity Lag

The fund signs a contract while waiting for rollovers to arrive.

The trustee uses a deposit bond to hold the property until settlement.
✅ Acceptable only if the bond is unsecured and expires at settlement.
❌ Non-compliant if it’s backed by fund assets or personal guarantees.

2️⃣ Member-Provided Bond

Members personally obtain the bond, then plan to have the SMSF reimburse the premium.
This can amount to a contribution, loan, or related-party transaction, depending on the facts — each with its own compliance pitfalls.

3️⃣ Lender Refusal

Some LRBA lenders reject deposit bonds altogether, treating them as “paper deposits”.
If funding falls through, the SMSF risks being contractually bound without the means to settle.

Best Practice for Trustees and Advisers

If trustees insist on using a deposit bond, the following safeguards are non-negotiable:

1. Structure it properly
   The bond must be issued to the bare trustee (holding trust) or SMSF trustee — never secured by fund assets.
2. Get lender approval upfront
   Confirm the lender’s acceptance before any contract is exchanged.
3. Keep the paperwork bulletproof
   • Trustee minutes documenting rationale and legal advice.
   • Bond certificate confirming no charge or recourse.
   • Confirmation that the bond expires at settlement.
4. Account for the premium correctly
   The premium is a small administrative expense — not an investment.
   The fund can pay it only if it doesn’t create security or recourse.
5. Check investment-strategy alignment
   The SMSF’s investment strategy should reflect the temporary use of a bond and liquidity management.

What Auditors Should Look For

Independent auditors must verify:

• The bond agreement and issuer details.
• Evidence that no fund asset was pledged or guaranteed.
• Minutes and resolutions showing trustee understanding.
• Lender consent under the LRBA.
• That all SIS Act requirements are satisfied before settlement.

If any red flags arise — such as personal guarantees, asset pledges, or inconsistent documentation — auditors should consider a Part A or Part B qualification and, if material, report to the ATO.

Why This Matters Now

The use of deposit bonds in SMSFs is being driven by market pressure, not prudence.
Trustees are competing with cash-rich buyers and developers, and want to “hold” an investment property before liquidity lands.

But innovation without compliance discipline leads to unnecessary risk.
The SIS Act doesn’t make exceptions for “hot markets”.

At Saul SMSF, our goal is to protect your brand, support your clients, and ensure every audit is well solved — even in new and evolving scenarios like this.

Final Word — Step Carefully, Seek Advice Early

Deposit bonds can work within an SMSF if structured correctly — but they’re not a shortcut.
Used incorrectly, they breach the core principles of limited recourse borrowing and put both the fund and its trustees in regulatory danger.

Before proceeding, trustees should:

• Obtain legal and financial advice,
• Ensure no charge is created over SMSF assets, and
• Confirm lender acceptance and audit readiness.

At Saul SMSF, we don’t just audit for compliance — we audit for clarity.
Our role is to help trustees and their advisers step forward with confidence, not caution.

If you’d like guidance on auditing or structuring LRBAs involving deposit bonds, contact Saul SMSF — Australia’s independent SMSF audit specialists.

Website: www.saulsmsf.com.au
Email: info@saulsmsf.com.au