What are SMSF Loans for Commercial Property?

Using Your SMSF to Purchase Commercial Property

A Self-Managed Super Fund can borrow money to purchase commercial property through a Limited Recourse Borrowing Arrangement, or LRBA. The recent legislative changes that restricted new borrowings for residential property do not apply to commercial acquisitions, meaning SMSFs can still use gearing strategies to acquire business real property including warehouses, retail premises, and agricultural land.

In Koo Wee Rup and surrounding townships, commercial property options commonly include agricultural sheds, packing facilities, main street retail shopfronts, and light industrial buildings servicing the region's horticultural and dairy sectors. The distinction between what qualifies as commercial and what does not comes down to actual use, not zoning or marketing descriptions.

An LRBA allows your SMSF to borrow funds where the asset is held in a separate holding trust until the loan is repaid. If the loan defaults, the lender's recourse is limited to the property held in trust. Other SMSF assets remain protected. Investment income from the property flows to the fund, and once the loan is fully repaid, legal ownership transfers from the holding trust to the SMSF trustee.

What Defines Business Real Property Under an SMSF

Business real property is land and buildings used wholly and exclusively in one or more businesses. The business does not need to be operated by the SMSF. Whether a property meets this definition depends on how it is actually used at the time your fund acquires it, not how it is zoned or advertised.

Consider a member who operates a packing business in Koo Wee Rup and intends to lease a commercial premises from their SMSF. The property must be used wholly and exclusively for the packing operation. If part of the building includes a residential dwelling or storage unrelated to the business, the property may fail the test entirely or only qualify in part. A small office or amenities block within a larger industrial building does not typically disqualify the property, provided the overall use remains commercial. The test is strict.

Mixed-use properties require careful assessment. A concession exists for primary production property where a dwelling occupying no more than 2 hectares does not cause the property to fail the wholly and exclusively test, provided the main use of the whole property is not domestic or private. Given the agricultural character of much of the Koo Wee Rup district, this concession may be relevant for farmland acquisitions, but it applies specifically to primary production property and does not extend to other commercial settings. Properties with a genuine residential component that do not meet this narrow exception are unlikely to qualify.

How a Limited Recourse Borrowing Arrangement Operates

The borrowed funds must be used to acquire a single asset. You cannot purchase multiple properties on separate titles under the one LRBA, even if they are substantially similar. The exception applies where properties are identifiable as a single asset because they have equal market value and are bought and sold together, which is rare in practice.

The asset is held in a bare trust, commonly referred to as the holding trust. Your SMSF holds the beneficial interest in the property and the right to acquire legal ownership once the loan is repaid. A discretionary trust cannot be used. The property cannot be subject to any other charge or encumbrance beyond the LRBA loan itself.

Borrowed funds can cover the purchase price, loan establishment costs, and stamp duty. They cannot be used to improve an existing SMSF asset or to fund renovations or extensions after acquisition. If you want to undertake capital works, those must be funded from the SMSF's existing cash reserves or rental income, not through further borrowings under the LRBA.

Loan Structure and Deposit Requirements

Most SMSF loans for commercial property require a deposit of at least 30 to 40 percent of the purchase price, meaning the loan-to-value ratio sits between 60 and 70 percent. Some lenders will consider a lower deposit where the property is leased to a quality tenant on a long-term lease, but this is assessed on a case-by-case basis.

The interest rate on a commercial SMSF loan is typically higher than a standard commercial loan outside superannuation, reflecting the additional complexity and limited recourse nature of the arrangement. Rates may be offered on a variable or fixed basis. Fixed rate terms are generally shorter than residential equivalents, commonly one to three years. The loan term itself can extend to 15 or sometimes 20 years, though this depends on the lender, the property type, and the age of the SMSF members.

Where the SMSF leases the property to a related party, such as a member's business, the lease must be documented and conducted on arm's length terms at market rent. The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5. If the loan is provided by a related party and the interest rate sits below the safe harbour rate, the income may be treated as non-arm's length income and taxed at 45 percent rather than the concessional rate of 15 percent.

Tax Treatment of Rental Income and Capital Gains

Rental income received by the SMSF is taxed at 15 percent during the accumulation phase. Where the fund is paying a retirement phase pension and the property is a segregated current pension asset, the rental income may be exempt from tax as exempt current pension income. This exemption depends on whether the fund's assets are fully segregated to support the pension or whether a proportionate method applies.

A capital gain realised on the sale of commercial property is also taxed at 15 percent in accumulation phase, or 10 percent where the property has been held for at least 12 months and the one-third CGT discount applies. The effective rate depends on the property's cost base, selling costs, capital improvements, and whether the fund has carried forward capital losses. Capital losses can only be offset against capital gains, not against rental income.

Where the property supports a retirement phase pension and the fund's assets are fully segregated at all times during the income year, the capital gain is disregarded entirely. If the fund uses the proportionate method, the exemption applies only to the proportion of the gain attributable to the pension phase, as determined by an actuarial certificate.

From 1 July 2026, members with a total superannuation balance above $3 million are subject to Division 296 tax. This tax applies to the proportion of fund earnings attributable to balances above that threshold. Rental income and realised capital gains form part of the earnings calculation. Unrealised increases in property value do not trigger a taxable event. Importantly, LRBA loan amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes, meaning the debt does not inflate the balance and potentially trigger the tax.

Sole Purpose Test and Related Party Transactions

Every SMSF investment, including commercial property held under an LRBA, must satisfy the sole purpose test under section 62 of the SIS Act. The fund must be maintained solely to provide retirement benefits to members. Decisions that confer a present-day benefit on a member or related party may contravene this requirement.

Leasing commercial property to a related party is permitted, provided the lease is documented, conducted at market rent, and satisfies the business real property definition. The property must be used wholly and exclusively in a business. The lease arrangement cannot favour the member's business at the expense of the fund's retirement purpose. Charging below-market rent, deferring rent payments without commercial justification, or allowing the tenant to make unapproved alterations are all examples of conduct that may breach the sole purpose test.

In our experience, issues arise where members treat SMSF-owned property as an extension of their business without maintaining the necessary separation. The fund is a distinct legal entity, and the relationship between the SMSF and the member's business must be arm's length in substance, not just in documentation.

Refinancing an Existing SMSF Commercial Loan

Refinancing a commercial SMSF loan is not affected by the recent legislative changes. You can move an existing loan to a new lender without the arrangement being treated as a new LRBA subject to the post-commencement rules. The ATO considers refinancing 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 asset originally acquired under the LRBA. The limited recourse character of the arrangement must be maintained, meaning the lender's recourse in the event of default remains limited to the property held in the holding trust. The loan must meet arm's length terms consistent with PCG 2016/5. If you are refinancing a loan provided by a related party, the interest rate and terms must align with the safe harbour guidelines to avoid non-arm's length income treatment.

A significant change to the terms or conditions of an LRBA may end the existing arrangement and trigger a new one. Circumstances that may end an arrangement include refinancing that is inconsistent with the original structure, borrowing to acquire an asset not contemplated under the original arrangement, or changes to the ultimate beneficiaries. A loan health check before refinancing can identify whether the proposed changes are consistent with the existing arrangement or whether they risk creating a new LRBA that may not comply.

Applying for a Commercial SMSF Loan in Koo Wee Rup

The loan application process involves assessment of both the SMSF's financial position and the property itself. Lenders will review the fund's current balance, contribution history, member ages, and cash flow capacity to service the loan from rental income or ongoing contributions. The property's location, tenant quality, lease terms, and valuation all factor into the lending decision.

In Koo Wee Rup, properties tied to the region's horticultural activity, such as packing sheds or cool storage facilities, may appeal to lenders where there is an established lease to a creditworthy tenant. Retail or light industrial premises on the main street may be assessed differently depending on vacancy rates and rental demand in the local market. Lenders will typically require a registered valuation, and in some cases a quantity surveyor's report if depreciation or capital works deductions are material to the fund's cash flow.

You will need a compliant SMSF trust deed, a holding trust deed, and confirmation that the property satisfies the business real property definition. The application timeline is generally longer than a standard home loan or investment loan, often taking four to eight weeks depending on the lender and the complexity of the structure. Working with an SMSF mortgage broker familiar with both the legislative framework and the local property market can reduce delays and ensure the arrangement is structured correctly from the outset.

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