When to Use SMSF Loans for Smaller Commercial Property

The law changed in August of last year, and many super fund members with accumulation balances above half a million dollars still believe they cannot borrow to purchase property through their SMSF.

You can, but only if the property qualifies as business real property at the time you enter into the loan and throughout its life. This means the land and buildings must be used wholly and exclusively in one or more businesses, and that requirement applies whether you are financing a shop in Camden's town centre or a warehouse near the Oran Park industrial precinct.

Business Real Property Under the Updated LRBA Rules

For an SMSF to enter into a Limited Recourse Borrowing Arrangement on or after 10 August 2026, the real property being financed must meet the definition of business real property when the arrangement begins and remain that way until the loan is repaid. Residential property that does not meet this definition can still be owned by your super fund, but it cannot be financed under an LRBA.

Consider a member with $680,000 in their SMSF who identifies a small commercial unit leased to a physiotherapy practice near Narellan. The unit is tenanted on a five-year lease and generates rental income that will be taxed at 15 per cent in the fund's accumulation phase. The SMSF trustee arranges a loan for 70 per cent of the purchase price, with the property held in a bare trust until the loan is repaid. Because the property is used wholly and exclusively in the tenant's business when the LRBA is entered into, the arrangement complies with the updated rules. If the tenant vacates and the trustee actively markets the premises for a new commercial tenant, the property does not stop being business real property during that period. If the trustee decides to abandon the plan to lease it commercially and leaves it vacant or repurposes it, the SMSF will have breached the borrowing prohibition.

What Qualifies as Wholly and Exclusively in a Business

A property is used wholly and exclusively in one or more businesses when its entire use is for business purposes and none of it is for private or domestic purposes. A commercial description on the title or in the lease does not by itself satisfy the definition. The actual use determines whether the property qualifies.

For land in a primary production business that contains a dwelling for private or domestic purposes, the property can still meet the requirement if the dwelling sits on no more than 2 hectares and the main use of the whole property is not domestic or private. This exception is narrow and does not extend to typical residential property with a home-based business component.

LVR and Deposit Requirements for SMSF Commercial Borrowing

Most lenders who offer SMSF loans for commercial property will lend up to 70 per cent of the property's value, meaning the fund needs a 30 per cent deposit plus settlement costs. Some lenders reduce the maximum LVR to 60 or 65 per cent depending on the property type, location, and tenant profile. Variable rate products are more common than fixed rate options in this segment, and interest rates are typically higher than standard residential loans due to the structure and the lender's limited recourse.

In our experience, funds purchasing smaller commercial premises such as medical suites, retail shops, or small office units in the Camden area often have members who have been contributing for 15 to 20 years and have built sufficient balances to meet the deposit requirement without needing to make large additional contributions. Where a member's total super balance is approaching $2.1 million, the timing of contributions and the interaction with the transfer balance cap and Division 296 tax become important considerations.

Refinancing an Existing SMSF Loan After the Rule Change

An LRBA entered into before 10 August 2026 is not affected by the new rule, even if the SMSF maintains or refinances it after that date. The property under the original arrangement does not need to be business real property.

Refinancing means entering into a new loan contract for the same asset, with the same or a new lender. A significant change to the terms or conditions of an LRBA can end the arrangement and start a new one. Changes that result in a new arrangement include refinancing the original borrowing, a borrowing inconsistent with the earlier arrangement such as borrowing to acquire an asset or class of asset not contemplated under the original arrangement, and a change to the ultimate beneficiaries of the arrangement. Varying the contract of borrowing does not always create a refinancing; this depends on the nature and extent of the variation and the intention of the parties. If you are refinancing an LRBA entered into on or after 10 August 2026, the property must still meet the business real property definition at the time of refinancing. Those considering refinancing an SMSF loan should confirm whether the original arrangement date falls before or after the rule change, as this determines which requirements apply.

Tax Treatment of Rental Income and Capital Gains in Accumulation Phase

Rental income from a property held under an LRBA in accumulation phase is taxed at 15 per cent, and loan interest is deductible against that income. A capital gain on the disposal of the property is also taxed at 15 per cent if the asset was held for less than 12 months. If the asset was held for at least 12 months, the fund is entitled to a one-third CGT discount, which produces an effective rate of 10 per cent on the discounted gain.

Net capital gain is total capital gains less capital losses for the year and unapplied capital losses from earlier years, less the discount and any other eligible concessions. Capital losses are not deductible against other income and can only be offset against capital gains, with excess losses carried forward. The liability also depends on the asset's cost base and the fund's overall tax position at the time of disposal.

Division 296 Tax and LRBA Amounts for Camden Members

Division 296 tax applies from 1 July 2026 and is assessed to the individual member, not the fund. For the current financial year, the large super balance threshold is $3 million and the very large super balance threshold is $10 million. Tax of 15 per cent applies to the proportion of a member's total super earnings that relates to the part of their total super balance above $3 million, and an additional 10 per cent applies to the proportion that relates to the part above $10 million.

LRBA amounts are never included in a member's total super balance for Division 296 purposes. This means the outstanding loan amount on an SMSF property held under an LRBA is excluded when calculating whether the member exceeds the $3 million threshold. For other purposes, including contribution cap eligibility and transfer balance cap calculations, a member's share of the outstanding LRBA balance is included in their total super balance if the LRBA was entered into on or after 1 July 2018 and either the lender is a related party or the member has met a condition of release with no cashing restriction.

SMSFs can elect to adjust the cost base of CGT assets to market value at 30 June 2026 for the purpose of working out Division 296 fund earnings. The election applies to all CGT assets held by the SMSF at that time, including property held through an LRBA trust. The election must be made by the due date of the SMSF annual return for 2026-27 and cannot be revoked. It does not need to be provided to the ATO, and records must be kept for 5 years after it becomes certain that no further CGT events can occur for the assets.

How Multiple Titles and Single Asset Treatment Apply

Multiple real property titles cannot be acquired under a single LRBA unless it is reasonable to conclude they are distinctly identifiable as a single asset. This means they must be identifiable, have the same market value as each other, and be bought and sold together. Real property on separate titles is not allowed even if the properties are substantially the same.

A collection of assets treated as a single asset that are real property must meet the business real property definition. This limitation affects funds that intended to acquire a portfolio of smaller commercial units or a mix of commercial and residential property under one borrowing arrangement. Each property would need to be financed under a separate LRBA, and each would need to qualify as business real property if the arrangement is entered into on or after 10 August 2026.

If you are considering the purchase of a smaller commercial property through your super fund and want to understand how the updated borrowing rules apply to your situation, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions