SMSF Commercial Loans: What Not to Overlook in 2026

Using your super to buy commercial property has changed since August. The new rules stopped residential borrowing through SMSFs but left commercial property untouched, which means buying a commercial building through a limited recourse borrowing arrangement is still an option if the property genuinely qualifies as business real property and your fund can meet lender requirements.

Why Commercial Property Is Still Available Under an SMSF Loan

Commercial property that meets the business real property definition under section 66 of the SIS Act remains available for purchase using a limited recourse borrowing arrangement. Business real property generally means 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 in the property. Whether a property qualifies depends on its actual use at the time of acquisition, not how it is marketed or zoned.

Consider a mechanic who wants to purchase a workshop through his SMSF. The workshop is a standalone building on a single title, used entirely for automotive repairs, with no residential component. The fund can borrow to acquire this property because the building is used wholly and exclusively for business purposes. The mechanic can lease the property back to his business at market rent, and the rental income flows into the SMSF.

What Counts as Business Real Property and What Doesn't

The business real property definition is precise and strict. A property marketed as commercial does not automatically satisfy the definition. A small office on one title that includes a separate studio apartment on the same site may fail the wholly and exclusively test unless the residential portion is genuinely incidental and used for a purpose related to the business. Mixed-use properties require careful assessment based on the nature and actual use.

A concession exists for certain primary production property. 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. This concession applies specifically to primary production property and is not a general exemption for all mixed-use properties.

The Single Asset Rule and Property Titles

Multiple real property titles cannot be acquired under a single LRBA. An exception applies where the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together. Properties on separate titles do not qualify even if substantially similar.

A fund cannot use one loan to buy a warehouse on three separate titles even if the titles form a single functional site. Each title would require a separate LRBA, which adds complexity and may not be commercially viable.

How Leasing Back to Your Business Affects In-House Asset Rules

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. This means an SMSF can purchase a commercial property and lease it back to a business owned by a member without breaching in-house asset limits, provided the lease is made on arm's length terms at market value.

In our experience, this is one of the main reasons business owners consider a commercial SMSF loan. A tradie running a plumbing business can buy the depot through the fund, lease it back to the business at market rent, and build the fund's balance with that rental income. The lease must reflect genuine market terms, which means obtaining a valuation or rental appraisal and documenting the arrangement properly.

Deposit and LVR Requirements for Commercial SMSF Loans

Most lenders offering SMSF loans for commercial property require a deposit of at least 30 to 35 percent, which means a maximum loan-to-value ratio of 65 to 70 percent. Some lenders cap LVR at 60 percent depending on the property type and location. Borrowed funds cannot be used to cover the deposit, which must come from existing SMSF contributions or fund income.

Consider a scenario where an SMSF with a balance of $400,000 wants to acquire a commercial property valued at market price. With a 35 percent deposit requirement, the fund would need $140,000 in cash, plus another $15,000 to $25,000 for stamp duty, legals, and loan costs depending on the state. Contributions caps apply, so building the required deposit may take several years unless the fund already holds sufficient cash or liquid assets.

Borrowing Capacity and Rental Income

Lenders assess borrowing capacity based on the rental income the property will generate, not the fund balance or member income. Rental income must cover loan repayments by a margin, typically 120 to 140 percent depending on the lender. A property that cannot generate sufficient rent to meet serviceability will not be approved regardless of the fund's balance.

A retail shop leased to a national tenant on a five-year lease will be viewed more favourably than a small office with a short-term lease to a single operator with no lease history. Lenders want evidence of stable rental income and a tenant who will meet obligations. Vacant properties or those with speculative rental estimates are difficult to finance.

Variable Rate or Fixed Rate for an SMSF Commercial Loan

Most SMSF commercial loans are offered on a variable rate basis. Some lenders offer fixed rate terms for one to five years, though SMSF fixed rates are typically higher than equivalent owner-occupier or standard investment loan rates. A variable rate gives flexibility to make extra repayments or pay out the loan without break costs, which can be useful if the fund receives a large contribution or pension payments cease and the trustees decide to sell.

The loan interest rate on a commercial SMSF loan is generally higher than a residential loan rate due to the limited recourse structure and commercial property risk profile. Rates vary depending on the lender, property type, location, LVR, and whether the loan is for a related party lease or an unrelated tenant.

What Happens If You Want to Refinance Later

Refinancing a commercial LRBA is not affected by the August changes. Compliance conditions continue to apply, including that the refinanced loan must relate to the same single asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms. 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.

If your loan is with a related party lender such as a family member, the interest rate charged must align with the ATO's safe harbour interest rates published 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 the highest marginal rate of 45 percent. Refinancing to a commercial lender may remove this compliance risk and may also improve the rate depending on market conditions.

Tax Treatment of Rental Income and Capital Gains

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax liability varies depending on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year.

Where a fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal of those assets is disregarded. 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. Rental income and capital gains in accumulation phase are taxed concessionally, but the outcome depends on the fund's structure and whether members are in pension phase.

Division 296 Tax and How It Affects Property Held in an SMSF

From 1 July this year, where a member's total superannuation balance at the end of the financial year exceeds $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. A capital gain must be realised through a CGT event for it to form part of the fund's assessable income and therefore the Division 296 earnings base. An unrealised increase in property value does not constitute a CGT event and does not by itself produce assessable income or Division 296 fund earnings.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes, which means only the fund's net equity in the property is counted, not the outstanding loan. Rental income and realised capital gains may contribute to the Division 296 calculation depending on the member's balance and the fund's earnings for the year.

If you're considering a commercial property purchase through your SMSF, the structure has to work commercially, meet the business real property definition, and align with your fund's long-term strategy. Call one of our team or book an appointment at a time that works for you.

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