Unlock the secrets to SMSF property loans

Borrowing through your self-managed super fund is still entirely possible, but the rules around what you can buy shifted this year.

From 10 August, new limited recourse borrowing arrangements for residential property stopped. Your fund can still borrow to buy property, but only if it qualifies as business real property under the superannuation legislation. That distinction now shapes every conversation about SMSF property purchases.

If you're based in Hawthorn East and considering whether your fund could acquire commercial premises along Camberwell Road, an office conversion near Auburn Village, or a retail tenancy closer to Glenferrie, the mechanics are worth understanding in detail.

What changed on 10 August for SMSF borrowing

The Treasury Laws Amendment inserted a new condition into the borrowing rules. LRBAs entered into from 10 August can only be used to acquire business real property, not residential.

Your fund can still own residential property outright if it has the cash. It can also hold any residential property purchased under an LRBA before 10 August, and refinance that loan without restriction. The change applies only to new borrowing arrangements for residential assets entered into on or after the commencement date.

Consider a fund with $450,000 in accumulation phase that wants to acquire a small commercial unit. The trustees could proceed with an LRBA provided the property satisfies the business real property definition at the time of purchase. If the same fund wanted to buy a two-bedroom apartment as a rental, it would need to pay cash.

How business real property is defined under the legislation

Business real property means land and buildings used wholly and exclusively in one or more businesses.

The business does not need to be yours. A retail tenancy leased to a third party qualifies. A warehouse leased to an unrelated logistics company qualifies. A medical consulting suite leased to a GP practice qualifies. What matters is that the property is used wholly and exclusively for business purposes at acquisition, and that use continues.

A property marketed as commercial does not automatically satisfy the test. Actual use determines compliance. SMSFR 2009/1 sets out the ATO's position in detail, including examples of properties that do and do not meet the definition. In our experience, mixed-use properties cause the most confusion. A shopfront with a residential apartment above may not qualify in full, or at all, depending on the specific layout and usage.

SMSF borrowing capacity and loan structures

The borrowed funds must be used to acquire a single asset. You cannot bundle multiple properties on separate titles under one LRBA unless they are distinctly identifiable as a single asset, which in practice almost never applies to real property.

The asset is held in a separate holding trust, often called a bare trust. Your SMSF acquires the beneficial interest and gains legal ownership after the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset in the trust. No other fund assets are at risk.

Borrowed funds can cover acquisition costs including stamp duty and establishment fees, but cannot be used to improve the asset after purchase. Capital works must be funded from the SMSF's cash reserves or rental income.

Loan-to-value ratios for commercial property loans through an SMSF typically sit between 60 and 70 percent, depending on the lender and the quality of the tenancy. Interest rates tend to be higher than standard investment loans, and fewer lenders offer SMSF products. Application timelines are longer, and documentation requirements stricter.

Tax treatment of rental income and capital gains

Rental income received by your SMSF is taxed at 15 percent in accumulation phase. Where the fund pays a retirement phase pension, and the property is segregated as a current pension asset for the entire income year, rental income may be exempt.

Capital gains are also taxed at 15 percent in accumulation phase, with a one-third discount available if the asset has been held for at least 12 months. The effective rate on the discounted gain could be as low as 10 percent, though the actual liability depends on the fund's cost base, capital improvements, selling costs, and whether it has carried-forward capital losses.

In pension phase, capital gains on segregated pension assets are disregarded entirely where the fund's assets are fully segregated at all times during the income year. For funds using the proportionate method, the exemption applies only to the exempt proportion of the net capital gain.

Division 296 tax applies from 1 July 2026 to members whose total superannuation balance exceeds $3 million. That tax is calculated on realised earnings, not unrealised gains. An increase in property value does not trigger Division 296 tax unless a CGT event occurs. Rental income and realised capital gains may contribute to the calculation. LRBA amounts are disregarded when determining whether a member's balance exceeds the threshold.

Leasing commercial property to a related party

Your SMSF can lease business real property to a related party, including a business you own or control, provided the lease is on arm's length terms.

This is one of the few exceptions to the related party rules under the SIS Act. The rent must reflect market rates, the lease must be documented properly, and the arrangement must satisfy the sole purpose test. Any decision that gives you or a related party a present-day benefit beyond what an unrelated tenant would receive could contravene the legislation.

Consider a member who operates a medical practice and whose SMSF purchases a consulting suite in a Hawthorn East medical precinct. The member's practice could lease the suite from the fund at market rent. The lease would need an independent valuation, a formal agreement, and regular reviews to confirm ongoing compliance. The rental income flows to the fund, taxed at the concessional rate, and the member's practice claims the rent as a deductible expense.

Refinancing an existing SMSF loan

If your fund entered into a residential LRBA before 10 August, you can refinance that loan without restriction. The ATO considers refinancing to mean entering a new loan contract for the same asset, with the same or a different lender.

The refinanced arrangement must relate to the same single acquirable asset, maintain the limited recourse character of the original loan, and meet arm's length terms. The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5. Arrangements that do not meet arm's length terms risk having income assessed as non-arm's length income and taxed at 45 percent.

Refinancing a commercial LRBA follows the same principles and is not affected by the August changes. The compliance conditions remain identical, and the safe harbour rates apply regardless of whether the property is residential or commercial.

Sole purpose and compliance obligations

Every SMSF investment must be maintained solely to provide retirement benefits. That is the sole purpose test under section 62 of the SIS Act, and it applies at all times to every decision your fund makes.

An investment that provides you or a related party with a present-day benefit may contravene the test. Living in a property owned by your fund, even temporarily, breaches the rules. Allowing a family member to use the property rent-free breaches the rules. Leasing a property to a related party at below-market rent may breach the rules.

Compliance is not automatic. Trustees carry personal liability for contraventions, and penalties range from administrative penalties through to disqualification and criminal prosecution in severe cases. The legislation assumes you understand your obligations, and ignorance is not a defence.

Call one of our team or book an appointment at a time that works for you. We work with SMSF loan applications regularly and can walk you through the structure, lender options, and compliance requirements before you commit.

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