Top tips to purchase retail property with SMSF loans

Purchasing retail property through your SMSF remains one of the few ways to use superannuation borrowings following the recent residential property ban.

Retail property includes shopfronts, shopping centre tenancies, and standalone commercial premises where goods or services are sold. The structure sits within a Limited Recourse Borrowing Arrangement, meaning the property is held in a bare trust, and if things go wrong, the lender's claim is limited to that single asset. The rest of your fund remains protected.

Why retail property suits SMSF lending structures

Retail property typically generates consistent lease income and qualifies as business real property under superannuation law. Lenders are familiar with commercial real estate within SMSFs, and the valuations, lease terms, and covenant strength of retail tenants provide clear benchmarks for serviceability. In our experience, funds with a solid cash position and an established lease to a creditworthy tenant move through the approval process with fewer complications than speculative or development-linked assets.

Consider a trustee acquiring a small retail shopfront leased to a national pharmacy chain. The tenant is on a five-year lease with a five-year option, paying monthly rent that covers the loan repayment plus fund expenses. The lender assesses the lease income, the tenant's covenant, and the fund's liquidity, then approves the loan at 70% LVR. The fund contributes the deposit and holds a cash buffer for rates, insurance, and unexpected repairs. The property generates income taxed at 15%, and because it is held for the sole purpose of providing retirement benefits, it meets the compliance threshold without triggering in-house asset concerns.

LVR and deposit requirements for retail LRBA purchases

Most lenders will lend between 65% and 75% of the property value for retail assets. The fund must contribute the balance as a deposit, and in practice, trustees should also hold an additional buffer of 5% to 10% of the asset value in cash to cover vacancies, maintenance, and other obligations. That liquidity is now scrutinised more closely than in previous years, as lenders want assurance that the fund can meet its obligations without relying solely on rental income.

How the bare trust and sole purpose test apply to retail property

The property is held in a bare trust, separate from the SMSF's other assets. Legal title sits with the trustee of the bare trust, and beneficial ownership sits with the SMSF trustee. The loan covers that single acquirable asset. If the fund later wants to purchase another retail property, it will need a second LRBA and a second bare trust. You cannot bundle two properties under one loan structure.

The sole purpose test means the property must exist purely to generate retirement benefits. You cannot use the retail premises for personal purposes, lease it to yourself at below-market rent, or allow a related party to occupy it unless specific exemptions apply and the arrangement remains at arm's length. Structural changes to the property are not permitted while the loan is outstanding. Repairs and maintenance are allowed, but anything that changes the fundamental character of the asset is not.

Rental income, related-party leases, and the 5% in-house asset limit

Rental income is taxed at 15% in the accumulation phase. If the property is eventually sold, capital gains are taxed at an effective 10% after applying the one-third discount. This concessional treatment makes retail property an attractive long-term hold for funds with sufficient liquidity and a willingness to manage tenancy and compliance.

If the property is leased to a related party, such as a business controlled by a fund member, it falls under the in-house asset rules unless an exemption applies. Business real property used wholly and exclusively in a business is exempt from the in-house asset test, which means a member's business can lease the property without breaching the 5% in-house asset threshold, provided the lease is on commercial terms and the property is not used for residential or mixed purposes. Retail premises leased to the member's own retail business typically qualify for this exemption, but the lease must be documented, reviewed annually, and structured at arm's length.

What lenders assess when reviewing SMSF retail property applications

Lenders look at the lease term, tenant covenant, rental yield, and fund liquidity. A five-year lease with options to a creditworthy tenant is stronger than a month-to-month arrangement with a startup. The lender will also review the fund's financial statements, trustee declarations, and compliance history. Trustees must demonstrate that the fund can service the loan, hold sufficient reserves, and meet ongoing obligations including insurance, rates, and maintenance.

Post-settlement liquidity is now a formal part of the assessment. Lenders expect the fund to retain a cash buffer, often 5% to 10% of the asset value, after settlement. This ensures the fund can cover vacancies, repairs, and compliance costs without breaching the loan terms or jeopardising the sole purpose test.

Compliance, trustee training, and ATO scrutiny under current rules

All SMSF trustees, including those with existing LRBAs, must now complete certified training covering borrowing arrangements, related-party transactions, cash flow planning, and compliance obligations. Non-compliance can result in penalties reaching $19,800, or in serious cases, fund disqualification. The ATO is using enhanced data-matching and transaction-monitoring to identify non-compliant arrangements, and trustees are expected to maintain rigorous records.

For related-party loans, the safe harbour interest rate for the 2025-26 financial year is 8.95%, down from 9.35% the previous year. This rate applies to LRBAs used to acquire real property and ensures the loan is structured on an arm's length basis. Even if the loan is from an external lender, the ATO will expect documentation, annual reviews, and evidence that the arrangement complies with superannuation law.

Refinancing an existing retail property LRBA is permitted, provided the refinance does not alter the single acquirable asset and the bare trust remains in place. The lender can only claim the property, not other SMSF assets, and the arrangement must comply with the original borrowing structure.

Retail property purchases through an SMSF require careful structuring, sufficient liquidity, and a clear understanding of compliance obligations. The decision to proceed should be based on the fund's capacity to service the loan, the quality of the lease, and the trustee's willingness to manage both the investment and the regulatory environment. If you are considering a retail property acquisition through your SMSF, call one of our team or book an appointment at a time that works for you.

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