Beginner's Guide to SMSF Warehouse Loans

A Self-Managed Super Fund can purchase a warehouse using a Limited Recourse Borrowing Arrangement, provided the property meets the definition of business real property under the Superannuation Industry (Supervision) Act 1993.

The purchase must be structured so the warehouse is held in a separate holding trust until the loan is repaid. If the loan defaults, only the warehouse itself is at risk, not other SMSF assets. This protection makes an LRBA different from standard commercial lending, but it also means fewer lenders participate in this market and borrowing capacity is typically lower than it would be for a personal investment loan.

Recent legislative changes have restricted new borrowing arrangements involving residential property, but commercial property that qualifies as business real property remains available for SMSF purchase with borrowing. The practical question for trustees considering a warehouse purchase is whether the property will be used wholly and exclusively in a business, and whether the fund can meet lender deposit and income requirements.

What Qualifies as Business Real Property for SMSF Borrowing

Business real property means land and buildings used wholly and exclusively in one or more businesses. The warehouse must be used entirely for business purposes at the time of acquisition. A property marketed as commercial does not automatically meet this test. Actual use determines compliance, not zoning or marketing descriptions.

Consider a trustee purchasing a warehouse in the Bass Coast industrial precinct. The property is tenanted by a logistics operator using the entire building for storage and distribution. This arrangement satisfies the wholly and exclusively test. If the same warehouse included a residential caretaker's flat or was partly used for private storage by a fund member, it would not qualify. The business does not need to be carried on by the SMSF itself. Leasing the warehouse to an unrelated third party conducting a business is sufficient.

Where a warehouse sits on multiple titles, each title is treated as a separate asset. An LRBA can only be used to acquire a single asset. Multiple titles can be acquired together under one LRBA only if they are distinctly identifiable as a single asset, meaning they are bought and sold together and have equal market value. Most warehouses on separate titles do not meet this test and would require separate borrowing arrangements or cash purchase of additional titles.

SMSF Commercial Loan Deposit and LVR Requirements

Lenders offering SMSF loans typically require a deposit of 30 to 40 percent of the purchase price. Maximum loan-to-value ratios for commercial property are lower than for residential property, reflecting both the regulatory structure of LRBAs and lender risk appetite for superannuation fund borrowing.

A warehouse purchased for $800,000 with a 35 percent deposit would require $280,000 in cash or existing fund assets, plus settlement costs including stamp duty, legal fees, and loan establishment costs. Borrowed funds can be used to cover some acquisition expenses, but cannot be used to improve an existing fund asset. Where the SMSF holds insufficient cash, trustees may consider making additional concessional or non-concessional contributions, subject to contribution caps. The concessional contributions cap is $32,500 per member per year. The non-concessional contributions cap is $130,000 per member per year, with bring-forward provisions available depending on the member's total superannuation balance.

Rental income from the warehouse can service the loan, but lenders assess serviceability using the fund's rental income, existing assets, and projected contributions. Unlike standard investment lending, personal income of fund members is not directly considered, though it may influence the fund's capacity to receive ongoing contributions.

How the Holding Trust Structure Works in Practice

The warehouse is purchased by a bare trust, not directly by the SMSF. The SMSF holds the beneficial interest in the property and receives rental income and capital growth, but legal title remains with the trustee of the holding trust until the loan is fully repaid. This structure is not optional. It is required under sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 to maintain the limited recourse character of the borrowing.

The holding trust must be established before settlement. The SMSF trustee and the holding trustee are usually the same individuals, but they act in different capacities. The holding trust deed, loan agreement, and trust deed for the SMSF must all be drafted to comply with the LRBA provisions. Any defect in documentation can cause the arrangement to fail compliance, which may result in the fund being treated as non-complying and taxed at 45 percent on its entire income and assets.

Once the loan is repaid, legal title transfers from the holding trustee to the SMSF trustee. Until that point, the warehouse cannot be sold, subdivided, or otherwise dealt with except in accordance with the terms of the holding trust and the loan agreement. The asset cannot be subject to any charge other than the charge securing the LRBA loan itself.

Leasing the Warehouse to a Related Party

A warehouse owned by an SMSF can be leased to a related party of the fund, including a business operated by a fund member, provided the lease is on arm's length terms at market value. Business real property leased to a related party is excluded from the in-house asset rules that would otherwise limit related party transactions to 5 percent of fund assets.

This exemption is particularly relevant in Grantville and surrounding areas where family businesses operate in primary production, warehousing, or light industrial sectors. A trustee who operates a small manufacturing business could lease a warehouse from their own SMSF, paying rent at the market rate. The rent must reflect what an unrelated tenant would pay for comparable premises. An independent valuation is recommended to establish and periodically review the rental amount. Rent paid below market value may be treated as non-arm's length income and taxed at 45 percent.

The sole purpose test still applies. The SMSF must be maintained for the sole purpose of providing retirement benefits to members. A lease arrangement that provides a non-commercial benefit to a related party, such as rent-free periods not available to other tenants or fit-out contributions beyond what a commercial landlord would provide, may breach the sole purpose test. Legal and tax advice specific to the arrangement is necessary before entering a related party lease.

Tax Treatment of Rental Income and Capital Gains

Rental income received by the SMSF is taxed at 15 percent during the accumulation phase. Deductions for loan interest, property management, repairs, insurance, and depreciation reduce the assessable income. Capital works deductions may also be available depending on the construction date and cost of the warehouse.

Where the SMSF is paying a pension to a member in retirement phase, investment income from assets supporting that pension may be exempt under the exempt current pension income provisions. The exemption depends on whether the fund's assets are segregated as current pension assets or whether the proportionate method applies. A fund with both accumulation and pension interests must calculate the exempt proportion, often requiring an actuarial certificate.

A capital gain on the sale of the warehouse is included in the fund's assessable income in the year the contract is signed, not the year of settlement. Where the warehouse has been held for at least 12 months, a one-third CGT discount applies, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the adjusted cost base, selling costs, prior capital works deductions, and whether the fund has capital losses to offset the gain. Capital losses cannot be offset against income and can only be used against capital gains.

From 1 July 2026, Division 296 tax applies to members whose total superannuation balance exceeds $3 million at the end of the financial year. Division 296 tax of 15 percent applies to the proportion of fund earnings attributable to the amount above that threshold. An additional 10 percent applies to earnings above $10 million. LRBA amounts are disregarded when calculating total superannuation balance for Division 296 purposes, but realised capital gains and rental income may contribute to the Division 296 earnings base. SMSFs can elect to adjust the cost base of CGT assets to market value as at 30 June 2026 to recognise accrued value prior to Division 296 commencement.

Refinancing an Existing SMSF Commercial Loan

Refinancing a commercial LRBA is permitted where the arrangement relates to the same asset and maintains the limited recourse character of the original loan. Refinancing to obtain a lower interest rate or different loan structure does not by itself end the LRBA, provided the terms remain consistent with the original arrangement and continue to meet arm's length conditions.

The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5. 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. Lenders offering SMSF commercial loans price according to their own risk assessment, and rates are typically higher than standard commercial lending due to the limited recourse structure and smaller market.

A significant change to the terms or conditions of an LRBA may end the existing arrangement and create a new one. Circumstances that may trigger this outcome include borrowing to acquire an asset not contemplated under the original arrangement, changes to the ultimate beneficiaries, or refinancing inconsistent with the original terms. Recent legislative changes restricting new residential LRBAs do not affect commercial property refinancing, but trustees should obtain current advice before proceeding with any refinancing to confirm the arrangement will remain compliant.

Contribution Strategy and Loan Serviceability

Lenders assess an SMSF's capacity to service a loan based on rental income, existing fund assets, and projected contributions. A trustee planning to purchase a warehouse should model contribution capacity over the anticipated loan term, particularly where rental income alone is insufficient to meet loan repayments.

Most SMSF members in Grantville and the Bass Coast region are either self-employed or employed in sectors where income fluctuates seasonally. Contribution patterns should reflect realistic capacity rather than maximum allowable caps. A trustee earning variable income may choose to make larger concessional contributions in strong years and rely on rental income and fund reserves in lean years, provided the loan can be serviced without default risk.

Borrowed funds cannot be used to improve the warehouse after acquisition. Where the property requires capital works, these must be funded from the SMSF's own cash reserves or additional member contributions. Drawdowns for capital improvements are not permitted for LRBAs entered into on or after 7 July 2010. A trustee acquiring a warehouse requiring significant fit-out or structural work should plan for these costs separately from the LRBA.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Grantville, Bass Coast, and South Gippsland to structure compliant borrowing arrangements and connect you with specialist SMSF legal and tax advisors where needed.

Frequently Asked Questions