Beginner's Guide to SMSF Commercial Property Loans

From 10 August 2026, Self-Managed Super Funds can no longer borrow to purchase residential property, but commercial property purchases through an LRBA remain fully available.

If you operate a business in Bennett Springs and have been building your superannuation balance, purchasing the commercial premises your business occupies may deliver both rental income to your fund and operational certainty for your business. The legislative changes that took effect in August removed residential property from the LRBA framework but left the pathway open for business real property acquisitions. Understanding how these loans work, what qualifies as business real property, and how the holding trust structure operates will determine whether this strategy suits your circumstances.

What Qualifies as Business Real Property Under an SMSF Loan

Business real property means land and buildings used wholly and exclusively in one or more businesses. The property must be actively used for business purposes at the time your fund acquires it. A commercial property listing or zoning designation does not automatically satisfy the definition. Actual use determines compliance.

Consider a Bennett Springs business owner operating a small manufacturing operation from a leased industrial unit in the Benara Road industrial precinct. If the SMSF purchases that unit and leases it back to the business, the property must be used wholly and exclusively for the manufacturing operation. The property cannot include a residential dwelling or be used for private purposes. Any mixed-use component may disqualify the property or require apportionment, depending on the specific circumstances.

An SMSF can lease business real property to a related party, including a business controlled by the member, provided the lease is on arm's length terms at market rental rates. This arrangement allows the SMSF to receive rental income taxed at 15 percent during accumulation phase, while the business pays rent as a deductible expense.

How the Limited Recourse Borrowing Arrangement Works

The SMSF loan must be structured so that the lender's recourse in the event of default is limited to the property being acquired, not the other assets held by the fund. The property is held in a separate holding trust, often referred to as a bare trust. The SMSF holds the beneficial interest in the property and acquires legal ownership after the loan is repaid. Investment returns, including rental income, flow to the SMSF during the loan term.

The borrowed funds must be used to acquire a single asset. Multiple properties on separate titles cannot be purchased under a single LRBA, even if they are similar or adjacent. Loan establishment costs and stamp duty may be funded from the borrowed amount, but the loan cannot be used to improve the property after acquisition. Capital improvements must be funded from the SMSF's own resources, not from borrowed funds.

A related party may provide a personal guarantee to the lender to support the loan application, but the lender's recourse must still be limited to the asset under the arrangement. This limited recourse character must be maintained throughout the life of the loan and through any refinancing.

Deposit Requirements and Loan LVR for Commercial SMSF Property

Most lenders offering SMSF commercial loans require a deposit of at least 30 to 35 percent, resulting in a maximum loan-to-value ratio of 65 to 70 percent. Some lenders may require a larger deposit depending on the property type, location, and the financial position of the fund and its members. The SMSF must have sufficient cash or liquid assets to fund the deposit, stamp duty, and settlement costs without breaching contribution caps or liquidity requirements.

In a scenario where an SMSF with a balance held across multiple members seeks to purchase a commercial property, the trustees may need to consolidate member balances, make additional concessional or non-concessional contributions within the relevant caps, or sell existing investments to generate the required deposit. The concessional contributions cap is $32,500 per member per annum, and the non-concessional cap is $130,000 per member per annum, with bring-forward provisions available depending on the member's total superannuation balance.

The SMSF must also maintain sufficient liquidity to meet loan repayments, fund operating expenses, and satisfy minimum pension payment requirements if any members are in pension phase. Lenders assess the borrowing capacity of the fund based on rental income, existing fund income, and the capacity of members to make additional contributions if required.

Variable Rate and Fixed Rate Options for SMSF Commercial Loans

Commercial SMSF loans are available on both variable and fixed rate terms. Variable rates allow flexibility in repayment and the ability to make additional repayments without penalty, but the loan interest rate will move in line with changes in the lender's pricing. Fixed rates provide certainty over repayment amounts for a set period, typically between one and five years, but may include restrictions on additional repayments and break costs if the loan is repaid early.

The decision between variable and fixed depends on the fund's cash flow, the members' risk tolerance, and the broader interest rate environment. Where rental income from the property provides the primary source of loan repayment, a fixed rate may provide certainty that repayments remain affordable during the fixed period. Where the fund has strong liquidity and members expect to make additional contributions or repayments, a variable rate may offer greater flexibility.

Loan terms for commercial property loans through an SMSF are typically shorter than standard commercial loans, often capped at 15 years, and interest-only periods may be limited or unavailable depending on the lender. The SMSF must be able to demonstrate that the loan can be repaid before the members reach pension age or within a reasonable period that aligns with the fund's investment strategy.

Tax Treatment of Rental Income and Capital Gains

Rental income received by the SMSF from a commercial property is taxed at 15 percent during accumulation phase. Where the property supports a pension in the retirement phase and the fund's assets are fully segregated as current pension assets, rental income may be tax-exempt under the exempt current pension income provisions. Where the fund holds both accumulation and pension interests, the tax exemption applies proportionately based on the fund's actuarial certificate.

A capital gain on the sale of the property is also taxed at 15 percent during accumulation phase, with a one-third discount available where the property has been held for at least 12 months, producing a maximum effective rate of 10 percent on the discounted gain. Where the property is sold after the SMSF has commenced a pension and the property supports that pension, the capital gain may be fully or partially exempt depending on whether the fund's assets are segregated and the proportion of pension versus accumulation interests.

From 1 July 2026, Division 296 tax applies an additional 15 percent tax on earnings attributable to a member's total superannuation balance above $3 million, and an additional 10 percent on balances above $10 million. Division 296 fund earnings include realised capital gains but not unrealised increases in property value. A capital gain is only included in the Division 296 calculation when a CGT event occurs, such as the sale of the property. Rental income and realised gains may both contribute to the Division 296 earnings base where a member's balance exceeds the relevant threshold.

Sole Purpose Test and Arm's Length Terms

All SMSF investments must satisfy the sole purpose test under section 62 of the SIS Act, which requires the fund to be maintained solely to provide retirement benefits to members. A decision to purchase commercial property and lease it to a related party business must be made on commercial terms and must not provide a present-day benefit to the member that contravenes the sole purpose test.

Where the SMSF leases the property to a business controlled by a member, the lease must be at market rental rates and on arm's length terms. The ATO publishes safe harbour interest rates for SMSF loans under Practical Compliance Guideline PCG 2016/5, which apply to both real property and listed securities. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent.

A lease agreement between the SMSF and a related party should be documented in writing, reviewed regularly, and adjusted to reflect market movements in rental rates. The fund's investment strategy must also document the rationale for the investment, the expected return, and how the investment aligns with the fund's risk profile and liquidity needs.

Refinancing an Existing SMSF Commercial Loan

Refinancing a commercial SMSF loan is not affected by the legislative changes that commenced in August. The refinanced loan must relate to the same single asset acquired under the original arrangement, maintain the limited recourse character of the original loan, and meet arm's length terms consistent with the ATO's safe harbour rates. Refinancing may allow the SMSF to access a lower interest rate, switch between variable and fixed terms, or consolidate related party lending into a commercial loan.

A significant change to the terms or conditions of an LRBA may end the existing arrangement and start a new one, which could affect the application of transitional provisions for residential property acquired before 10 August 2026. For commercial property, refinancing on substantially similar terms to acquire the same asset is generally treated as a continuation of the original arrangement, provided the limited recourse structure and arm's length terms are maintained.

Where the original loan was provided by a related party, refinancing to a commercial lender does not change the character of the arrangement, provided the refinanced loan relates to the same asset and the holding trust structure remains in place. Offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance.

Call one of our team or book an appointment at a time that works for you to discuss whether an SMSF commercial property loan aligns with your retirement strategy and your business needs.

Frequently Asked Questions