Top 10 Ways to Use Your SMSF for Commercial Property

Your super can purchase commercial property while residential borrowing is now restricted.

The ban on new residential SMSF loans from 10 August 2026 has closed one door, but commercial property remains fully accessible for Ambulance Victoria employees building wealth through their Self-Managed Super Fund. Commercial property that satisfies the business real property definition under section 66 of the SIS Act is not affected by the 2026 residential ban. This shifts the focus to income-producing assets like warehouses, retail premises, medical suites, and office space.

This article covers how commercial SMSF property loans work, what the Limited Recourse Borrowing Arrangement requires, and how to structure a purchase that meets compliance conditions while building your retirement income.

What Qualifies as Business Real Property Under SMSF Rules

Business real property means land and buildings used wholly and exclusively in one or more businesses. The test is actual use at the time your fund acquires the property. A warehouse leased to a logistics company qualifies. A medical suite leased to a GP or allied health practice qualifies. A retail shopfront leased to a cafe or clothing store qualifies.

Where the property contains a dwelling for private or domestic purposes, it can still qualify if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private. A rural property with a farmhouse attached may qualify if the main use is agricultural business activity. The business does not need to be carried on by your fund. The tenant runs the business and your fund collects the rent.

Vacant land not currently used in a business does not meet the definition. Mixed-use properties where the main use is residential do not qualify. If you are considering a property that includes any private or domestic component, obtain advice from an SMSF specialist before proceeding.

How a Limited Recourse Borrowing Arrangement Structures the Purchase

Under an LRBA, the asset is held in a separate holding trust. The SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. Your fund does not own the property outright until the loan is discharged. The holding trustee, typically a bare trustee company, holds legal title during the loan term.

If the loan defaults, only the asset held in trust is at risk. Investment returns from the asset flow to the SMSF. Rental income goes into your fund. Loan repayments come from your fund's cash flow, which includes rental income, member contributions, and other investment earnings. The lender cannot pursue your fund's other assets or your personal assets if the property value falls short of the outstanding debt.

The borrowed money must be used to acquire a single asset, or a collection of identical assets with the same market value that can be treated as a single asset. You cannot borrow to purchase multiple commercial titles under one loan unless they meet the narrow exception for assets that are identifiable as a single unit, have equal market value, and are bought and sold together. Most commercial purchases involve one title per loan.

SMSF Deposit Requirements and Loan to Value Ratios for Commercial Property

Most lenders offering commercial SMSF loans require a deposit between 30 and 40 percent of the purchase price. Some lenders will advance up to 70 percent LVR for commercial property held in an SMSF, but the typical range sits between 60 and 70 percent. Your fund needs sufficient cash or liquidated assets to cover the deposit, plus stamp duty, legal costs, and loan establishment fees.

Consider a scenario where your SMSF holds $200,000 in cash and listed shares. You identify a small retail unit leased to a pharmacy on a five-year lease. The deposit requirement is 35 percent, or $105,000. Stamp duty and legal costs add another $20,000. Your fund has enough cash to proceed without requiring additional contributions. After settlement, the rental income of $32,000 per annum covers most of the annual loan repayments, with the shortfall met by contributions or dividend income from the remaining listed shares.

If your fund does not hold sufficient cash, you can make additional concessional or non-concessional contributions up to the annual caps. The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. Members with a total superannuation balance below the threshold on 30 June of the previous year may access the bring-forward arrangement for non-concessional contributions. Building your fund balance through salary sacrifice or voluntary contributions over 12 to 24 months before purchasing commercial property is a common approach for Ambulance Victoria employees in their 40s and 50s.

Can Your SMSF Lease Commercial Property to a Related Party

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. Your SMSF can purchase a commercial property and lease it to a business you operate or own. This arrangement is specifically permitted under the SIS Act, unlike residential property.

Any such lease must be made on arm's length terms at market value. The rent your business pays to your SMSF must reflect what an independent tenant would pay for the same premises in the same location. Obtain a rental valuation from a licensed valuer or a commercial real estate agent with experience in the local market. Document the valuation and review it annually. If the ATO determines the lease is not at arm's length, the rental income may be taxed at the highest marginal rate rather than the concessional rate of 15 percent.

In our experience, Ambulance Victoria employees who operate side businesses in allied health, consulting, or retail use this structure to shift commercial rent from a personal expense to a tax-deductible business cost while building their super balance. The business pays rent at market value, claims a tax deduction, and the fund receives income taxed at 15 percent during accumulation phase or zero percent during pension phase.

What You Cannot Do With Borrowed Funds Under an SMSF Commercial Loan

Borrowed funds cannot be used to improve an existing asset. You cannot take out an SMSF loan to renovate or extend a commercial property your fund already owns. You cannot draw down additional funds under an existing LRBA to add a second storey, replace the roof, or upgrade the fit-out. Capital improvements must be funded from your fund's existing cash reserves or additional member contributions.

Drawdowns for capital improvements are not permitted for LRBAs entered into on or after 7 July 2010. If your commercial property requires significant work after purchase, factor that cost into your cash flow planning before you settle. A property purchased at a lower price because it needs refurbishment may appear attractive, but your fund must hold enough cash after settlement to complete the work without borrowing.

Expenses such as loan establishment costs and stamp duty may also be covered. These costs can be included in the borrowed amount, reducing the cash your fund needs at settlement. Confirm with your lender which costs can be capitalised into the loan and which must be paid from fund cash.

How Division 296 Tax Affects Members With Large Super Balances

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds the large super balance threshold of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the threshold. This additional tax applies to the earnings on the portion of your balance above $3 million, not the entire balance.

Where the total superannuation balance exceeds the very large super balance threshold of $10 million, an additional 10 percent Division 296 tax applies to the proportion of earnings above that threshold. For Ambulance Victoria employees with balances approaching or exceeding these thresholds, commercial property held in an SMSF can produce rental income taxed at 15 percent during accumulation phase, but any growth in value attributable to balances above the thresholds will attract Division 296 tax.

Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. The outstanding loan amount is added to your balance for the purpose of calculating whether you exceed the thresholds. This inclusion increases the likelihood of triggering Division 296 tax if your balance is already close to $3 million.

Refinancing an Existing Commercial SMSF Loan After the Residential Ban

Refinancing of commercial LRBA arrangements is not affected by the 2026 residential ban. You can refinance your commercial SMSF loan to a different lender or to a lower rate without triggering compliance issues related to the new residential restrictions. The refinanced loan must relate to the same property, maintain the limited recourse character of the original arrangement, and meet arm's length terms.

The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5. These rates are updated annually. If your loan is with a related party lender, the interest rate must fall within the published safe harbour range or you must obtain independent evidence that the rate is consistent with what an arm's length lender would charge. Loans with authorised deposit-taking institutions are presumed to meet arm's length terms.

In the event of a default, recourse of the lender against the SMSF trustees must be limited to the asset being acquired under the arrangement. This condition must be maintained through refinancing. If you refinance to a new lender, the loan documentation must preserve the limited recourse structure. A related party may provide a personal guarantee, but their recourse must also be limited to the property under the arrangement.

Refinancing your SMSF commercial loan may reduce your annual repayments, increase cash flow for other investment strategies, or allow you to consolidate multiple loans if your fund holds more than one commercial property acquired under separate LRBAs. Speak with a broker experienced in SMSF lending before approaching lenders directly.

Setting Up the Bare Trust and Holding Trustee Structure

The holding trust requires a separate trustee entity. Most SMSF administrators and solicitors use a bare trustee company established specifically for the LRBA. The bare trustee holds legal title to the property until the loan is repaid. The holding trust deed sets out that the SMSF is the beneficial owner and that legal title will transfer to the SMSF once the debt is discharged.

The holding trustee company is not the same entity as your SMSF trustee. If your SMSF has individual trustees, the holding trustee is still a separate company. If your SMSF has a corporate trustee, the holding trustee for the LRBA is a different company. Each property acquired under a separate LRBA requires its own holding trust and holding trustee entity.

You cannot place an existing SMSF asset into an LRBA after your fund already owns it. The LRBA structure must be established before settlement of the property purchase. If your fund already owns a commercial property outright and you wish to borrow against it, the SIS Act does not permit that arrangement. The borrowed funds must be used to acquire the asset, not to refinance an asset your fund already holds.

Legal and establishment costs for the bare trust, holding trustee company, and loan documentation typically range from $2,000 to $5,000 depending on the complexity of the structure and the jurisdiction. Some lenders include these costs in the loan amount. Others require payment from fund cash before settlement.

Rental Income, Expenses, and Tax Treatment in Accumulation Phase

Rental income received by your SMSF from a commercial property is taxed at 15 percent during accumulation phase. Investment returns from the asset flow to the SMSF. Your fund reports the rental income in its annual tax return and claims deductions for loan interest, property management fees, insurance, council rates, repairs, and depreciation.

Loan interest is fully deductible against the rental income. If the property generates $40,000 in annual rent and the loan interest is $25,000, the net rental income before other expenses is $15,000. After deducting property management fees, insurance, rates, and depreciation, the taxable income may reduce to $8,000. Your fund pays $1,200 in tax on that income.

Negative gearing within an SMSF works differently to negative gearing in your personal name. If the property expenses exceed the rental income, the loss can offset other income within the fund, such as dividend income or capital gains. The loss cannot be offset against your personal income or your Ambulance Victoria salary. Members sometimes misunderstand this distinction when comparing SMSF property investment to personal property investment.

Once your fund moves into pension phase, rental income becomes tax-exempt. A commercial property producing $40,000 in annual rent generates that income without any tax liability once the fund is paying a pension to a retired member. This shift makes commercial property particularly attractive for members in their late 50s or early 60s who plan to start a pension within a few years of purchasing the property.

Capital Gains Tax and the Discount for SMSF Property Sales

If your SMSF sells the commercial property after holding it for more than 12 months, the fund is entitled to a one-third capital gains tax discount during accumulation phase. A property purchased for $300,000 and sold for $450,000 generates a capital gain of $150,000. After applying the one-third discount, the taxable capital gain is $100,000. Your fund pays $15,000 in tax on that gain.

If the property is sold while the fund is in pension phase and supporting a retirement income stream, the capital gain is exempt from tax. The timing of a property sale can significantly affect the tax outcome for members approaching retirement.

Capital gains are included in your total superannuation balance for the purpose of Division 296 tax calculations. If your balance exceeds $3 million and the property sale pushes your earnings above the threshold, the proportion of earnings attributable to the amount above $3 million attracts an additional 15 percent tax. This layering of tax can reduce the net benefit of selling a commercial property for members with large balances.

For Ambulance Victoria employees building long-term wealth through their SMSF, holding commercial property through retirement and relying on rental income rather than capital growth is a common strategy. The tax-exempt rental income during pension phase provides a steady cash flow without triggering capital gains tax or Division 296 tax on realised gains.

Call one of our team or book an appointment at a time that works for you. We work with SMSF lenders and trustees who understand how Ambulance Victoria employees structure their super for commercial property investment, and we can walk you through the compliance requirements, deposit planning, and cash flow modelling before you commit to a purchase.

Frequently Asked Questions