Everything you need to know about SMSF office loans

Buying commercial property through your SMSF is still permitted under the new LRBA rules that came into effect in August.

The recent changes to limited recourse borrowing arrangements restrict new residential property purchases, but business real property including office buildings remains available for SMSF acquisition with borrowing. The difference matters if you're sitting on super balances large enough to fund a deposit and want an alternative to traditional accumulation strategies.

What qualifies as business real property for SMSF purposes

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be your own. An office building leased to unrelated tenants can qualify, as can a building leased back to your own trading company, provided the lease is documented at market rates.

Actual use determines eligibility, not zoning or marketing descriptions. A property advertised as commercial does not automatically satisfy the definition if part of it is used for non-business purposes. Mixed-use buildings require specific assessment. An office with a small residential apartment attached may not qualify in full, or at all, depending on how the space is divided and used.

Consider a medical practice owner in Balwyn looking to acquire the premises their company currently rents. The building is a standalone office on Whitehorse Road with consulting rooms, a reception area, and a small kitchenette for staff. Provided the entire building is used for the practice and no part is set aside for private or domestic use, the property could meet the business real property definition. The SMSF could borrow to acquire it under a commercial property loan structured as an LRBA, and the company could lease it back from the fund at market rent.

In that scenario, the SMSF receives rental income taxed at 15 percent during accumulation phase or potentially exempt during pension phase, and the company continues to claim a tax deduction for rent paid. The arrangement must be documented properly, with a formal lease, independent valuation, and regular rent reviews to satisfy arm's length requirements.

How Limited Recourse Borrowing Arrangements work for commercial property

Under an LRBA, the SMSF borrows money to acquire an asset, and that asset is held in a separate bare trust until the loan is repaid. The fund holds a beneficial interest in the property and gains legal ownership once the debt is cleared. If the loan defaults, the lender's recourse is limited to the asset in the trust, not the fund's other holdings.

The borrowed funds must be used to acquire a single asset. Multiple office suites on separate titles cannot be purchased under one LRBA, even if they are in the same building or bought at the same time. Loan proceeds can cover the purchase price, stamp duty, and loan establishment costs, but cannot be used to renovate or improve the property after settlement.

The holding trust must be a bare trust, not a discretionary or unit trust. The SMSF trustee must be the sole beneficiary with an unconditional right to acquire legal title after making one or more payments. Most lenders and SMSF administrators have standard documentation for this structure, but it must be reviewed by a licensed SMSF specialist before proceeding.

Commercial SMSF loans typically require a deposit of 30 to 40 percent, though some lenders will consider lower loan-to-value ratios depending on the property type, location, and tenant profile. Interest rates are higher than standard investment loans, and rental income from the property is assessed as part of the fund's servicing capacity. If the building is vacant or leased to a related party, some lenders apply stricter criteria or decline the application outright.

Tax treatment of rental income and capital gains

Rental income received by an SMSF is taxed at 15 percent during accumulation phase. If the fund is paying a pension and the property is a segregated pension asset for the entire financial year, rental income could be exempt. Where the fund has both accumulation and pension interests, only the proportion of income attributable to pension assets is exempt, determined either by segregation or an actuarial certificate.

Capital gains on commercial property held for at least 12 months attract a one-third discount, producing a maximum effective rate of 10 percent in accumulation phase. The actual tax depends on the fund's cost base, capital improvements, selling costs, and whether the fund has carried-forward capital losses. During full pension phase with segregated assets, the capital gain may be entirely disregarded.

Division 296 tax applies from 1 July 2026 where a member's total superannuation balance exceeds $3 million at the end of the financial year. An additional 15 percent tax is levied on the proportion of earnings above that threshold, with a further 10 percent applying above $10 million. For SMSF purposes, Division 296 fund earnings are based on realised income, not unrealised gains. Rental income and capital gains from property sales contribute to the calculation, but an increase in property value alone does not trigger Division 296 tax unless a CGT event occurs.

LRBA amounts are disregarded when calculating total superannuation balance for Division 296 purposes, meaning the outstanding loan reduces the balance for threshold testing. SMSFs could elect to revalue all CGT assets to market value as at 30 June 2026, which resets the cost base for Division 296 calculations and recognises pre-commencement growth. That election applied to all CGT assets, could not be revoked, and had to be made by the fund's annual return due date.

Leasing back to your own business

An SMSF can lease commercial property to a company or trust controlled by a fund member, provided the lease is on arm's length terms. The rent must reflect market value, the lease must be documented in writing, and rent must be paid on time. Any arrangement that provides a present-day benefit to a member or related party without proper commercial terms risks breaching the sole purpose test.

In practice, leasing back to your own business can deliver a tax-effective outcome. The trading entity claims a deduction for rent paid, while the SMSF receives income taxed at 15 percent or potentially exempt during pension phase. Over time, the property is owned by the fund rather than the business, which may reduce exposure to business creditors and provide a stable asset base for retirement.

The arrangement requires regular review. Market rent can shift, and a lease set five years ago may no longer satisfy arm's length requirements today. Independent valuations should be obtained when the lease is first signed and at each renewal. Failure to document the lease or charge below-market rent can result in non-arm's length income, which is taxed at 45 percent.

Refinancing and safe harbour interest rates

SMSF loan refinancing is permitted for both new and existing LRBAs, provided the refinanced loan relates to the same asset and maintains the limited recourse character of the original arrangement. The ATO's position is that refinancing means entering into a new loan contract for the same asset, with the same or a different lender.

Interest rates on related party loans must meet arm's length requirements. The ATO publishes safe harbour rates annually under Practical Compliance Guideline PCG 2016/5. Loans that fall within the safe harbour range are accepted as arm's length without further inquiry. Loans outside the range are not automatically non-compliant, but the trustee must be able to demonstrate the rate is commercially reasonable based on the asset type, loan term, security, and borrower profile.

Where a loan does not meet arm's length terms, income derived from the arrangement may be treated as non-arm's length income and taxed at 45 percent. This applies even if the higher income results from a below-market interest rate rather than inflated rent.

Sole purpose test and investment strategy

Every SMSF investment, including commercial property, must be made for the sole purpose of providing retirement benefits to members. Decisions that prioritise lifestyle, convenience, or present-day benefit over retirement outcomes can breach section 62 of the SIS Act.

An SMSF cannot acquire property from a related party unless it qualifies as business real property or listed securities. Even where acquisition is permitted, the transaction must be at market value. An SMSF cannot lease residential property to a member or their relatives, and business real property leased to related parties must be on arm's length terms.

The fund's investment strategy must be reviewed regularly and should address the decision to borrow, the level of borrowing, liquidity, diversification, and whether the investment aligns with the members' retirement goals and risk tolerance. Where a large portion of the fund's assets is tied up in a single commercial property, trustees need to consider how they will meet pension payments, pay Division 296 tax if applicable, and manage ongoing costs such as rates, insurance, and maintenance.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can connect you with advisers who understand the current rules and how they apply to your circumstances.

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