Top Strategies to Buy Commercial Property with SMSF

The recent legislative changes mean you can no longer use a new SMSF loan to buy residential property, but commercial property remains on the table.

If you're running a plastering business and thinking about buying your workshop, warehouse, or even the commercial space you're already renting, your SMSF might be the funding vehicle that makes it happen. The government's August 2026 restriction on new residential limited recourse borrowing arrangements doesn't apply to commercial property, provided it meets the business real property definition. That definition is narrower than you might think, and getting it wrong means you've breached super law before you've even settled.

What Counts as Business Real Property

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business doesn't have to be yours, and it doesn't have to be owned by your SMSF. It just has to be genuinely commercial in use at the time you acquire it.

A warehouse leased to a logistics company qualifies. A shopfront leased to a cafe qualifies. Your plastering workshop with office space and storage for materials qualifies, provided there's no residential component on the same title. A property marketed as commercial doesn't automatically meet the test. The actual use at the time of purchase determines whether it qualifies, and the ATO has issued detailed guidance on what passes and what doesn't.

Why Mixed-Use Properties Are a Problem

If the property includes any residential use, you're into complex territory. A warehouse with a caretaker's flat on the same title likely fails the wholly and exclusively test. A rural property with a homestead and sheds might partially qualify under the primary production concession, but only if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic. For plasterers looking at a commercial premises with an attached residence, the safest path is to treat the property as ineligible unless you've had a specialist SMSF lawyer confirm otherwise.

Consider a plasterer who finds a combined workshop and residential unit on a single title in an industrial area. The property is advertised as commercial, the zoning allows both uses, and the rent would cover most of the loan repayments. Without splitting the title or removing the residential component, that property won't meet the business real property definition. The SMSF can't borrow to acquire it under a limited recourse borrowing arrangement, even though half the property is genuinely commercial.

How the Limited Recourse Borrowing Arrangement Works

Your SMSF doesn't own the property directly while the loan is outstanding. The property sits in a separate bare trust, and your SMSF holds the beneficial interest. Once the loan is repaid, legal ownership transfers to the SMSF. If the loan defaults, the lender's recourse is limited to the property in the trust. No other SMSF assets are at risk.

The borrowed funds must be used to acquire a single asset. You can't buy two commercial units on separate titles under one loan, even if they're next door to each other and you plan to knock through. Loan establishment costs and stamp duty can be included in the borrowing, but you can't use borrowed money to renovate or improve the property after settlement. Any improvements must be funded from the SMSF's cash reserves or rental income.

Deposit and Loan-to-Value Ratio Requirements

Most lenders offering SMSF loans for tradies want a deposit of at least 30 to 40 percent for commercial property. Some will lend up to 70 percent of the property value, but expect a higher interest rate and stricter servicing criteria. Your SMSF needs enough cash or liquid assets to cover the deposit, plus settlement costs, plus a buffer for holding costs while the property is tenanted.

If your SMSF balance is $250,000 and you're looking at a $500,000 commercial property, you'll need at least $200,000 for the deposit and settlement, leaving little room for ongoing costs. Rental income from the property flows back into the SMSF and can be used to service the loan, but the loan must be serviceable from the fund's existing resources at the time of application. Lenders don't give much weight to projected rental income that hasn't yet materialised.

Leasing the Property to Your Own Business

You can lease the commercial property to your plastering business, and it's one of the most common reasons tradies use an SMSF to buy commercial property. The lease must be on arm's length terms at market rent. If you're paying below-market rent, the ATO may treat the arrangement as providing a benefit to a related party, which breaches the sole purpose test. If you're paying above-market rent, you're shifting money from your business to your super in a way that might trigger non-arm's length income rules and a 45 percent tax rate on the rental income.

Get a formal valuation or rental appraisal before you sign the lease. Make sure the lease is documented properly, with rent reviews, outgoings, and maintenance responsibilities clearly set out. The SMSF owns the property, so your business is the tenant. If your business can't pay the rent, the SMSF can't waive it without breaching super law.

Tax Treatment of Rental Income and Capital Gains

Rental income received by the SMSF is taxed at 15 percent in the accumulation phase, or exempt if the SMSF is fully in pension phase and the assets are segregated as current pension assets. Where the SMSF has both accumulation and pension interests, the tax exemption is proportional, based on an actuarial certificate.

Capital gains are also taxed at 15 percent in accumulation phase, with a one-third discount if the property has been held for at least 12 months, giving a maximum effective rate of 10 percent on the discounted gain. The actual tax depends on the property's cost base, capital improvements, selling costs, and whether the fund has any capital losses to offset. In pension phase, capital gains may be fully or partially exempt depending on whether the fund's assets are segregated and whether the fund meets the conditions for exempt current pension income.

Division 296 Tax and Large Super Balances

From 1 July 2026, members with a total superannuation balance above $3 million pay an additional 15 percent tax on earnings attributable to the amount above that threshold. Members with a balance above $10 million pay an additional 10 percent on earnings above that second threshold. The thresholds are indexed annually.

Division 296 tax applies to realised earnings, not unrealised gains. If your commercial property increases in value but you don't sell it, that increase doesn't trigger Division 296 tax. Rental income and capital gains realised through a sale do contribute to the earnings calculation. LRBA loan amounts are disregarded when calculating your total superannuation balance, so the debt against the property doesn't reduce your balance for Division 296 purposes.

Refinancing an Existing SMSF Commercial Loan

Refinancing a commercial LRBA is not affected by the 2026 residential restriction. You can refinance to a different lender, move from a variable to a fixed rate, or restructure the loan term, provided the refinanced loan relates to the same property and maintains the limited recourse character of the original arrangement.

The ATO's position is that a significant change to the terms of an LRBA can end the existing arrangement and create a new one. Refinancing that increases the loan amount to acquire a different property, or that changes the ultimate beneficiaries of the arrangement, may be treated as a new LRBA. Where the refinancing is a straightforward substitution of lender or rate type for the same property and same SMSF, it's generally treated as maintaining the existing arrangement. The ATO had not published updated guidance on refinancing under the post-commencement rules as at July 2026, so trustees refinancing existing residential LRBAs should seek specialist advice before proceeding.

Arm's Length Terms and Safe Harbour Rates

The loan must be on arm's length terms. The ATO publishes safe harbour interest rates each year under Practical Compliance Guideline PCG 2016/5. If your loan sits within the safe harbour range, the ATO won't challenge whether the terms are arm's length. If the interest rate is below the safe harbour rate, the ATO may assess the rental income or investment returns as non-arm's length income and tax it at 45 percent.

Where a related party lender provides the loan, the interest rate, loan term, and security arrangements must reflect what an unrelated commercial lender would require. A loan from a related party at zero interest, or with no repayment schedule, will be treated as non-arm's length and the income taxed accordingly. If a related party provides a personal guarantee to an external lender, their recourse must also be limited to the property held in the bare trust, not to other SMSF assets.

What Happens When Your Super Reaches Pension Phase

Once you retire and start a pension from your SMSF, the tax treatment changes. Investment income, including rent and capital gains, may be exempt from tax if the assets are segregated as current pension assets and the fund meets the conditions for exempt current pension income. If your SMSF has both pension and accumulation interests, the exemption is proportional.

The general transfer balance cap is $2.1 million for members starting a pension for the first time from 1 July 2026. If your SMSF balance exceeds that cap, you can't move the entire balance into pension phase. The portion above the cap remains in accumulation phase and continues to be taxed at 15 percent on income and realised gains. Managing the split between pension and accumulation assets, especially where a large commercial property is involved, requires careful planning and often an actuarial certificate each year.

Using Super to Fund Your Retirement Workshop

For plasterers in their 50s with a decent super balance and a long-term commercial lease, buying the premises through an SMSF can lock in the location, eliminate rent increases, and build a tangible asset inside super. The rent you pay as a tenant goes back into your own fund, the capital growth is taxed concessionally, and when you retire, the income may be tax-exempt.

Consider a plasterer in their mid-50s with an SMSF balance of $400,000. They've been leasing a commercial unit for their plastering business at $30,000 per year. The landlord is selling, and the property is on the market for $450,000. The SMSF can borrow $270,000 at 70 percent LVR, using $315,000 from the fund for the deposit and settlement. The plastering business signs a formal lease with the SMSF at market rent of $30,000 per year. That rent services the loan and contributes to the SMSF's cash flow. Over the next 10 years, the loan is repaid, the property transfers to the SMSF, and when the member retires and starts a pension, the rental income and any future capital gain may be tax-exempt.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can walk you through whether a commercial property purchase fits your fund's circumstances and how the numbers stack up after the 2026 changes.

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