Your Self-Managed Super Fund can borrow to purchase an office building under a Limited Recourse Borrowing Arrangement, provided the property meets the business real property definition and complies with strict structural and legal requirements.
What is a Limited Recourse Borrowing Arrangement for Commercial Property
A Limited Recourse Borrowing Arrangement allows an SMSF to borrow funds to acquire a single asset, with the asset held in a separate holding trust until the loan is repaid. The asset being acquired must be business real property under section 66 of the SIS Act, meaning land and buildings used wholly and exclusively in one or more businesses. The business using the property does not need to be carried on by the entity holding the interest. If the loan defaults, the lender's recourse is limited to the asset held in trust, protecting other fund assets. Investment returns from the property flow to the SMSF during the loan term.
Recent changes to residential SMSF borrowing do not affect commercial property loans. From 10 August 2026, new LRBAs can only be used to acquire business real property, but this restriction simply codifies what was already standard practice for office buildings and other commercial premises. Existing SMSF loans remain unaffected.
Consider a Dianella-based business owner approaching retirement who wants their fund to purchase a small office building on Grand Promenade. The property is tenanted by a physiotherapy practice on a commercial lease. The SMSF trustee arranges a Commercial SMSF property loan with a 70 percent loan-to-value ratio, meaning the fund contributes a 30 percent deposit from existing accumulation balances. The property is acquired through a bare trust structure, with the SMSF holding beneficial ownership and the right to acquire legal title once the loan is repaid. Rental income from the tenant flows to the SMSF and is taxed at 15 percent during the accumulation phase, while loan repayments are made from a combination of rental income and any additional contributions.
Does Your Office Building Meet the Business Real Property Test
The property must be used wholly and exclusively in one or more businesses at the time of acquisition. Whether a property qualifies as business real property is determined by its actual use, not how it is zoned or marketed. An office building leased to a business tenant under a commercial lease will typically satisfy this requirement. A property marketed as commercial does not automatically qualify if the actual use differs.
Mixed-use properties require careful assessment. A building with office space on the ground floor and a residential apartment on the upper level may not satisfy the wholly and exclusively test. Where a property includes both commercial and residential components, only the portion used exclusively for business purposes may qualify. The ATO's guidance in SMSFR 2009/1 sets out detailed examples of properties that do and do not satisfy the definition.
In Dianella, many office buildings along Alexander Drive and Grand Promenade are purpose-built commercial premises leased to medical practices, accounting firms, and professional services. These properties are likely to meet the business real property definition. Properties with attached residential dwellings or spaces used for private purposes will not qualify, and should be reviewed by an SMSF specialist before proceeding.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Solve It Finance today.
How Does the Holding Trust Structure Work
The asset must be held in a separate holding trust, commonly referred to as a bare trust, until the loan is fully repaid. The SMSF trustee holds a beneficial interest in the asset and the right to acquire legal ownership after making one or more payments. A discretionary trust cannot be used for this purpose. The holding trust cannot be structured as a unit trust in which the SMSF is one of several unit holders.
The borrowed funds must be used to acquire a single asset or a collection of identical assets with the same market value. Multiple office buildings on separate titles cannot be acquired under a single LRBA, even if they are substantially similar. An exception applies where the properties are distinctly identifiable as a single asset, meaning they are bought and sold together and have equal market value.
Borrowed funds can cover the property purchase price, loan establishment costs, and stamp duty. Funds cannot be used to improve an existing asset. If your SMSF already owns a commercial property outright, that property cannot be placed into an LRBA retrospectively. For arrangements entered into on or after 7 July 2010, drawdowns for capital improvements are prohibited.
What Are the Deposit and Loan LVR Requirements
Most lenders require a minimum deposit of 30 percent for commercial property acquired under an SMSF loan, meaning the maximum loan LVR is typically 70 percent. Some lenders may accept a lower deposit depending on the fund's financial position, the property's location and tenancy, and whether the loan is with a related or unrelated lender. The deposit must come from existing SMSF accumulation balances or from concessional or non-concessional contributions made prior to settlement.
The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum, with bring-forward arrangements available where the member's total superannuation balance on 30 June of the previous year was below $1.84 million. Members with balances at or above $2.1 million have a nil non-concessional cap and cannot make further non-concessional contributions.
When assessing borrowing capacity, lenders consider the fund's rental income, existing liquid assets, member contribution history, and the property's tenancy profile. A property with a long-term tenant on a registered lease will generally support a higher loan amount than a vacant property or one with a short-term tenancy agreement.
What Interest Rates Apply to SMSF Commercial Loans
Interest rates on SMSF commercial loans are typically higher than standard owner-occupied home loans due to the additional complexity and risk associated with the LRBA structure. Rates vary depending on whether the loan is with a bank, non-bank lender, or related party, and whether the loan is on a variable or fixed rate basis.
Where the loan is made by a related party, the interest rate must comply with arm's length terms under Practical Compliance Guideline PCG 2016/5. The ATO publishes safe harbour interest rates annually for 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, which significantly erodes the tax concessions available within superannuation.
An SMSF mortgage broker who specialises in commercial property can compare SMSF lenders and identify which lenders are currently accepting applications for office buildings in Dianella. Not all lenders offer SMSF commercial loans, and those that do often apply different credit policies depending on the property type, location, and whether the fund intends to lease the property to a related party.
Can Your SMSF Lease the Property to a Related Party
Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules under the SIS Act. This means your SMSF can purchase an office building and lease it to a business you control, provided the lease is made on arm's length terms at market value. The lease must be documented, registered where required, and reviewed periodically to ensure the rent remains consistent with market rates.
Any decision to lease the property to a related party must satisfy the sole purpose test under section 62 of the SIS Act. Trustees must ensure the fund is maintained solely to provide retirement benefits to members. Decisions that give members or related parties a present-day benefit, such as below-market rent or preferential lease terms, may contravene this requirement.
In a scenario where a Dianella member operates a registered training organisation and wants their SMSF to purchase the office building the business currently rents, the fund can acquire the property under an LRBA and lease it back to the business. The lease must reflect market rent for comparable premises in the area, typically assessed by an independent valuer. Rental income is taxed at 15 percent in the fund's accumulation phase, and loan repayments are made from that income and any additional contributions.
How is Rental Income and Capital Gains Tax Treated
A complying SMSF is taxed at 15 percent on its assessable income, including rental income and net capital gains. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. This is not a separate or fixed CGT rate. The actual tax liability depends on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, and the fund's overall tax position for that year.
Where the fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal is disregarded. From the 2022 financial year, where all of a fund's assets are paying retirement phase pension benefits at all times of the year, the fund's assets are regarded as segregated current pension assets. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.
Capital losses cannot be claimed against income and can only be offset against capital gains. Where capital losses exceed capital gains in a financial year, the net capital loss is carried forward to offset against capital gains in future income years. The treatment of rental income and capital gains is one of the key tax advantages of using super to buy a commercial investment property, particularly where the property is held for the long term and transitions into pension phase.
What Happens if You Want to Refinance the Loan
Refinancing of commercial LRBA arrangements is not affected by the 2026 changes to residential SMSF borrowing. The ATO considers refinancing an LRBA to mean entering into a new loan contract for the same asset, with the same or a new lender. The refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms.
A significant change to the terms or conditions of an LRBA may end the arrangement and start a new one. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement. Refinancing to achieve a lower variable rate or to switch from a variable to a fixed rate is typically permissible, provided the arrangement continues to meet all compliance conditions.
If you are considering refinancing an existing SMSF commercial loan, the new lender will require an updated valuation of the property, confirmation that the holding trust structure remains compliant, and evidence that the lease terms are consistent with market rates. 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, and may be used in conjunction with the refinanced loan.
What Role Does an SMSF Specialist and Broker Play
An SMSF loan application involves coordination between the SMSF trustee, an SMSF specialist accountant or administrator, a solicitor experienced in holding trust structures, and a broker who can compare SMSF lenders. The holding trust must be established correctly, the property must satisfy the business real property test, and the loan terms must comply with PCG 2016/5 where a related party is involved.
Lenders assess SMSF commercial loan applications differently to standard commercial property loans. They review the fund's trust deed, the holding trust deed, evidence of the property's business use, tenancy agreements, and the fund's financial statements. Not all lenders are familiar with SMSF structures, and those that are may have minimum loan amounts, restricted postcodes, or specific requirements around tenancy length and lease registration.
Working with a broker who understands both the lending criteria and the legislative framework reduces the risk of delays or declined applications. The broker can identify which lenders accept office buildings in Dianella, whether your fund's deposit is sufficient, and what documentation will be required prior to formal application.
Using super to buy a commercial investment property is a long-term decision with tax, retirement planning, and legal implications. The structure must comply with the SIS Act and ATO guidance at the time of acquisition and throughout the life of the loan. Any changes to the property's use, tenancy, or loan structure should be reviewed by an SMSF specialist before proceeding.
Call one of our team or book an appointment at a time that works for you to discuss whether an SMSF commercial loan is appropriate for your fund's circumstances.
Frequently Asked Questions
Can my SMSF borrow to buy an office building in Dianella?
Yes, your SMSF can borrow to purchase an office building under a Limited Recourse Borrowing Arrangement, provided the property meets the business real property definition and is used wholly and exclusively in one or more businesses. The asset is held in a separate holding trust until the loan is repaid.
What deposit do I need for an SMSF commercial property loan?
Most lenders require a minimum deposit of 30 percent for commercial property acquired under an SMSF loan, meaning the maximum loan LVR is typically 70 percent. The deposit must come from existing SMSF accumulation balances or from concessional or non-concessional contributions made prior to settlement.
Can my SMSF lease the office building to my own business?
Yes, your SMSF can lease business real property to a related party, provided the lease is made on arm's length terms at market value and the arrangement satisfies the sole purpose test. The lease must be documented, registered where required, and reviewed periodically to ensure rent remains consistent with market rates.
How is rental income from an SMSF-owned office building taxed?
A complying SMSF is taxed at 15 percent on rental income during the accumulation phase. Where the fund's assets are fully in pension phase and segregated as current pension assets, rental income may be exempt under the exempt current pension income rules.
Can I refinance an existing SMSF commercial loan?
Yes, you can refinance an existing SMSF commercial loan to the same or a new lender, provided the refinanced arrangement relates to the same single asset, maintains the limited recourse character, and meets arm's length terms. The 2026 changes to residential SMSF borrowing do not affect commercial property refinancing.
