Top tips to buy investment property with your SMSF

Borrowing through your SMSF to buy property changed on 10 August.

The law still allows Self-Managed Super Funds to borrow under a Limited Recourse Borrowing Arrangement, but new residential property purchases are now off the table. From 10 August 2026, LRBAs entered into to purchase real property can only be used to acquire business real property. Commercial property is still fair game, and if you already had a residential SMSF loan before that date, you can keep it and refinance it.

The change matters because plenty of tradies have built decent balances in super and want those funds working harder than a term deposit. Property inside super can deliver rental income taxed at 15 percent and capital gains taxed at a maximum effective rate of 10 percent if you hold for more than 12 months in accumulation phase. If the property supports a pension, those taxes can drop to zero.

What counts as business real property for an SMSF loan

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 your own. Your SMSF might own a warehouse leased to a logistics company, a retail shop leased to a hairdresser, or a workshop leased to an unrelated engineering firm. What matters is the actual use of the property, not how it is zoned or marketed.

Consider a sparky who runs a one-person electrical business and wants to buy a small industrial unit. If the plan is for the SMSF to buy the unit and lease it back to the sparky's business, that can work. Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. The lease must be on arm's length terms at market rent, and the property must be used wholly and exclusively for the business. Using part of the unit for storage of personal tools or a mate's boat would break the rule.

Mixed-use properties need careful assessment. A rural property with a house and a working farm might qualify under a specific concession for primary production, but a suburban commercial building with a caretaker's flat could fail the wholly and exclusively test. Get advice from an SMSF specialist before signing anything.

How Limited Recourse Borrowing Arrangements work

Under an LRBA, the asset is held in a separate holding trust. Your SMSF holds a beneficial interest in the property and takes legal ownership once the loan is repaid. If the loan defaults, the lender can only claim the property in the holding trust, not other SMSF assets. Rental income from the property flows to your SMSF.

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 can cover loan establishment costs and stamp duty with the borrowed funds, but you cannot use the loan to renovate or improve the property later. If you want to add a mezzanine level to a warehouse, that money must come from the SMSF's existing cash, not a drawdown on the loan.

The holding trust cannot be a discretionary trust. The SMSF trustee must have a clear beneficial interest and the right to acquire legal ownership after the loan is repaid. Most brokers and SMSF administrators use a bare trust structure to meet this requirement.

Deposit and loan-to-value limits for SMSF property loans

Most lenders will lend up to 70 or 80 percent of the property value for a commercial SMSF loan, depending on the property type and location. That means a deposit of 20 to 30 percent plus costs. Industrial sheds in metro areas might get 80 percent. A rural service station might get 70 percent or require a case-by-case assessment.

Residential SMSF loans that were written before 10 August can still be refinanced, and LVRs for those are often similar. The restriction on new residential LRBAs does not stop your SMSF from buying residential property outright with cash, but most funds do not have that kind of liquidity sitting idle.

Lenders also assess the rental income from the property when working out borrowing capacity. A commercial property on a long lease to a national tenant will be viewed more favourably than a short-term lease to a start-up. Vacancy rates, lease term, tenant creditworthiness, and property condition all affect the borrowing amount.

Interest rates and loan terms for SMSF commercial property

SMSF loan rates sit above standard home loans for tradies and investment loans. Expect rates in the range you would see for a low-doc or commercial property loan. Most SMSF lenders offer variable rates, and a smaller number offer fixed terms, typically one to five years.

The ATO publishes safe harbour interest rates each year under Practical Compliance Guideline PCG 2016/5. These rates apply when the lender is a related party, such as when you lend money from your own pocket to your SMSF. 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. If you are borrowing from a bank or non-bank lender at commercial terms, the safe harbour rates are less relevant, but the loan still needs to be on arm's length terms.

Loan terms for SMSF property can run up to 30 years, but interest-only periods are typically capped at five or ten years. After that, principal and interest repayments kick in. Some funds prefer interest-only to preserve cash flow, especially if members are still in accumulation phase and contributing regularly.

Tax treatment of rental income and capital gains in your SMSF

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Rental income from a commercial property is taxed at 15 percent during accumulation phase. If you hold the property for at least 12 months before selling, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain.

Once your SMSF starts paying a pension, the tax picture changes. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income (ECPI). If the property is fully segregated as a pension asset and you meet the minimum pension payment requirements, rental income and capital gains can be tax-free. If your SMSF has both accumulation and pension members, the exemption is proportionate.

Capital losses can only be offset against capital gains, not against rental income. If your SMSF sells one property at a loss and another at a gain in the same year, the loss reduces the taxable gain. If there is no gain that year, the loss carries forward.

What existing residential SMSF loans can and cannot do

The changes do not apply where an SMSF exchanges a binding contract to acquire real property before 10 August 2026. If you exchanged contracts on a residential property before that date, you can settle and establish the LRBA after 10 August without issue. The changes commencing 10 August 2026 do not impact the refinancing of arrangements existing prior to that date.

You can refinance an existing residential LRBA to a new lender to get a lower rate or release equity for another compliant investment, as long as the refinanced loan relates to the same property and maintains the limited recourse character. You cannot refinance and then use the extra borrowing to buy a second residential property under a new LRBA. That would be a new arrangement subject to the post-commencement rules.

If you make significant changes to the terms of an existing LRBA, the ATO may treat it as a new arrangement. Refinancing to a new lender at a different rate is fine. Changing the asset being acquired or the ultimate beneficiaries of the arrangement is not.

Division 296 tax and what it means for property held in super

From 1 July 2026, where a member's total superannuation balance (TSB) at the end of the financial year exceeds the large super balance threshold (LSBT) of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the LSBT. If your balance exceeds $10 million, an additional 10 percent tax applies to the portion 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 increase in property value does not trigger Division 296 tax until you sell. Rental income and realised capital gains do count toward the calculation. LRBA amounts are disregarded when calculating a member's TSB for Division 296 tax purposes. The outstanding loan balance is excluded, so only the equity portion of the property affects your total super balance.

If your SMSF held property at 30 June 2026, you can elect to reset the cost base to market value for Division 296 purposes. This election applies to all CGT assets the fund held at that date, cannot be revoked, and must be made by the due date of the 2026-27 SMSF annual return. It recognises value that built up before Division 296 tax started.

Sole purpose test and related party leasing

The sole purpose test under section 62 of the SIS Act requires trustees to ensure the fund is maintained solely to provide retirement benefits to members. Every decision about the SMSF property must be made with that purpose in mind. Leasing a commercial property to your own business at below-market rent to help cash flow would breach the sole purpose test. Leasing at above-market rent to inflate super contributions might also raise issues.

Related party leases are allowed for business real property, but the rent must be at market rate and reviewed regularly. The lease terms must be documented in writing and consistent with what an unrelated tenant would accept. Using the property for personal benefit, letting a mate use it rent-free, or storing non-business assets there will put the fund offside.

Your SMSF cannot acquire residential property from a related party under any circumstances, even if paying full market value. It can acquire business real property from a related party, provided it meets the definition and the transaction is at arm's length. This is one area where getting it wrong can result in significant penalties, so get independent valuation and legal advice before proceeding.

What happens if your SMSF property loan defaults

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. The lender cannot pursue other SMSF assets, your personal assets, or your business assets. A related party can provide a personal guarantee to help the SMSF secure finance, but the guarantee must also limit recourse to the property in the holding trust.

If the SMSF cannot meet loan repayments and the lender forecloses, the property is sold and the proceeds go to the lender. Any shortfall is worn by the lender, not by you personally or by the other assets in the fund. This limited recourse feature is what makes the LRBA structure compliant under the SIS Act, and it must be maintained through the life of the loan and any refinancing.

In practice, most lenders will work with the SMSF trustee to avoid foreclosure where possible, including restructuring repayments or switching to interest-only for a period. The risk is higher if the property has a short-term lease or high vacancy, which is why lenders are more cautious with SMSF loans than with standard finance for tradies.

Can you use an offset account with an SMSF loan

Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance. If your lender offers an offset account linked to the SMSF loan, the SMSF can use it to park cash and reduce interest without breaching the LRBA rules. The offset account must be a genuine facility offered by a bank, not a makeshift arrangement.

Not all SMSF lenders offer offset accounts, and those that do may charge higher rates or fees. The benefit depends on how much cash the SMSF is likely to hold. If your fund receives quarterly rent and pays monthly loan instalments, an offset account can reduce interest on the balance between rent payments.

Using an offset account does not change the tax treatment of the loan or the property. Interest charged on the loan is not deductible to the SMSF because super funds do not receive deductions for borrowing costs in the same way individuals do. The rental income is still assessable, and the reduced interest simply means lower expenses and higher net income for the fund.

If you are weighing up whether to use your super to buy commercial property or funnel more into your business, get advice that looks at both the SMSF rules and your overall tax position. The legislation is not something you want to interpret yourself, and the ATO is still updating guidance following the August changes. Call one of our team or book an appointment at a time that works for you.

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