When to Use Your Super for a Mixed-Use Property

SMSFs can still borrow to buy commercial property, but a workshop with a flat upstairs throws up questions that most brokers won't touch.

The restriction on new residential SMSF loans from August this year hasn't stopped you buying commercial property through your super. What it has done is put a spotlight on mixed-use properties. If you're an electrician looking at a commercial unit with a residence attached, or a warehouse with a caretaker's flat, you need to know whether that counts as business real property or whether the residential component kills the deal.

What Counts as Business Real Property Under the New SMSF Rules

Business real property is land and buildings used wholly and exclusively in one or more businesses. The property must be used that way at the time your SMSF buys it. A property zoned commercial or advertised as commercial doesn't automatically qualify. The ATO looks at actual use, not what the agent's brochure says.

Consider a sparky buying a 300-square-metre workshop in an industrial estate. The building has a small office, a storage area, and a kitchenette for smoko. That's business real property if it's used wholly for the business. Now take the same workshop with a self-contained two-bedroom flat built into the upstairs section. The residential component changes the calculation.

How the Residential Component Affects SMSF Borrowing

A mixed-use property may not qualify as business real property, or may only partially qualify, depending on how much of the property is genuinely used for business purposes. The problem is that partial qualification doesn't help you under the borrowing rules. Your SMSF can only borrow to acquire business real property. If part of the property is residential, the entire property may fail the test.

There's a concession for primary production property where a dwelling on up to two hectares doesn't disqualify the whole property, provided the main use is not domestic or private. That concession doesn't extend to your electrical contracting business. If you're buying a commercial property with a residential flat attached, you need specialist advice before you sign anything, because the flat could stop the SMSF loan going ahead.

Can You Lease Part of the Property to Your Own Business

You can lease business real property held in your SMSF to a related party, including a business you own or control, provided the lease is on arm's length terms at market value. The property must still qualify as business real property in the first place. If the residential component means the property doesn't meet the definition, the related party lease option won't fix that problem.

In our experience, electricians often look at properties where the commercial space would be leased to their contracting business and the flat would be rented to an unrelated tenant. Even if both uses are income-producing, the residential tenancy means the property isn't used wholly and exclusively in a business. The income from the flat doesn't convert it into business use.

What Happens to CGT When You Sell the Property

A complying SMSF is taxed at 15 percent on assessable income, including net capital gains. If your fund has held the property for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax depends on the property's cost base, selling costs, capital improvements, and the fund's overall position that year.

If the SMSF is in pension phase and the property is a segregated current pension asset, the capital gain may be disregarded entirely. From the 2022 financial year, where all of a fund's assets are paying retirement phase pension benefits at all times during the year, the assets are regarded as segregated. If the fund has both accumulation and pension interests, only a proportion of the gain may be exempt, determined by an actuarial certificate.

When Refinancing a Commercial SMSF Loan Makes Sense

Refinancing a commercial SMSF loan is not affected by the August 2026 changes. The refinanced loan must relate to the same single asset, maintain the limited recourse character, and meet arm's length terms. The ATO publishes safe harbour interest rates each year under Practical Compliance Guideline PCG 2016/5. If your SMSF loan doesn't meet arm's length terms, rental income from the property may be assessed as non-arm's length income and taxed at 45 percent.

If you took out a commercial SMSF loan three years ago and rates have moved, refinancing to a lower rate can reduce the loan cost without triggering the new restrictions. The key is that the refinanced loan must be for the same property. You can't refinance and then swap the asset or change the beneficiaries without creating a new arrangement.

Borrowing Capacity and Deposit Requirements for SMSF Commercial Loans

Most lenders will lend up to 70 percent of the property value for a commercial SMSF loan, which means your fund needs a 30 percent deposit plus costs. Some lenders go to 80 percent, but the interest rate is usually higher and the approval criteria tighter. Your super balance is the main constraint. If your SMSF has $150,000 and you're looking at a $400,000 property, the numbers won't work unless you or other members can make additional contributions.

Concessional contributions are capped at $32,500 per year. Non-concessional contributions are capped at $130,000 per year, or up to $390,000 over three years under the bring-forward rule if your total superannuation balance was below $1.84 million on 30 June of the previous year. If you're planning a commercial property purchase through your SMSF, map out the deposit and contribution strategy at least 12 months ahead. Rushing contributions in the same year as settlement can push you over the caps and trigger excess contributions tax.

Sole Purpose Test and Using the Property Yourself

Every SMSF investment must be maintained solely to provide retirement benefits to members. If you buy a workshop through your SMSF and lease it to your electrical contracting business, the lease must be at market rent. If you buy a property with a flat and let a family member live there rent-free, you've breached the sole purpose test. The same applies if you use the workshop for storage without a formal lease or pay below-market rent to keep your business costs down.

The sole purpose test applies at all times, not just when the ATO audits your fund. Decisions that give you or related parties a present-day benefit can result in penalties, loss of concessional tax treatment, and in serious cases, disqualification as a trustee. If you're using your super to buy property, treat it like any other landlord-tenant arrangement. Document everything, charge market rates, and keep the fund's interests ahead of your own convenience.

If you're weighing up an SMSF loan against a standard investment loan or finance for your business, call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can tell you whether the property you're looking at will pass the business real property test before you waste time on contracts.

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