What counts as commercial property in an SMSF
Now that the government has effectively banned your SMSF from acquiring residential property, or, more precisely, from acquiring non-business real property under a limited recourse borrowing arrangement (LRBA), more and more clients are asking us to explain what counts as commercial property.
Since the beginning of SMSF borrowing one criterion was that it could only apply the borrowings to a single acquirable asset. Under the new legislation, the government changed the meaning of an “acquirable asset” by introducing a third test
“(c) for an asset that is real property — the asset is business real property (within the meaning of section 66 of this Act).”
The SIS Act defines business real property (BRP), and commercial property does not always align with that definition. Most of us understand what commercial property is; however, while commercial property is typically BRP, it can fail the BRP test if it also includes residential or private use.
An SMSF is still able to acquire residential property, but it cannot borrow for that purpose. Borrowings for residential properties existing prior to 10 August 2026 are grandfathered, and refinancing of those properties after that date remains acceptable. There is also a carve-out for contracts for residential property executed prior to the new legislation’s enactment.
What is business real property (BRP)?
The critical meaning of BRP is that the property is used ‘wholly and exclusively’ for one or more businesses. However, if the property also has residential or personal use, the property is not used ‘wholly and exclusively’ for a business and can fail the BRP test. The ATO provides a detailed explanation and examples of when property is considered to be BRP in SMSFR 2009/1.
The SIS legislation defines BRP as:
“business real property”, in relation to an entity, means:
(a) any freehold or leasehold interest of the entity in real property; or
(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph–any interest belonging to that class that is held by the entity;
where the real property is used ‘wholly and exclusively’ in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.”
Examples of BRP include the following where the property is used in one or more businesses and any non-business use is minor and trifling or is an appreciable part of the business:
- Retail shop, such as a clothing shop, butcher, cake shop, etc.
- Professional offices, such as an accountant, lawyer, architect or quantity surveyor.
- Factory or a warehouse
- A farm where all of the property is used in a primary production business – special rules apply allowing a private residence not exceeding 2 hectares (approximately 5 acres), which can be the residence of the farmer who is also a member of the SMSF owning the property.
What property might qualify as Non-BRP?
The following properties are likely to not meet the business real property definition:
- Vacant land unless there is a current business use.
- Residential property used for a private dwelling, such as a single-family home, holiday flat, or a townhouse
- Extended gap in commercial tenants can cause issues meeting the definition while temporary gaps do not change a business property from being BRP, but if the vacancy is for an extended period and there is no provable activity to seek a new tenant, it may fail the BRP test
When would the ATO consider the business-use requirement satisfied under the ‘wholly and exclusively’ test?
A property used wholly for business, with no private or residential use, will generally satisfy the ‘wholly and exclusively’ use test. However, the ATO takes a less literal approach and considers practical factors such as:
- wholly – is the whole area used for business?
- exclusively – is the business use of the property exclusive of other uses?
- appreciable degree – to what degree is the property used in a business (nil use would fail the test)
- minor non-business use – insignificant, trifling or incidental non-business or private use may not cause the property to fail the test.
Example 22 from the ATO’s SMSFR 2009/1: Shop co-located with an uninhabitable residence.
Therese Ireland owns a shop with a residence on the same title. Therese is considering selling the land to her SMSF, the Greystones SMSF. Therese uses the shopfront to operate her hairdressing salon. Prior to the death of the occupant a year earlier, the residence had been rented out for 15 years. It is discovered that the residence is not fit for habitation: walls are unsafe, the kitchen is not functional, and the stairs are not stable. On this basis, Therese is considering renovating the residence to enable an extension of the salon.
While the whole of the premises is not used in the business, the premises are used in a business to an appreciable degree. Although there has been recent continuous non-business use, that use has permanently ceased. As a consequence, Therese may sell the land to the Greystones SMSF without contravening the related party asset acquisition rule in section 66.
When can a residential property be BRP?
A residential property, such as a house in suburbia zoned residential, used ‘wholly and exclusively’ by a doctor to operate their medical practice, or a house converted to a dentist’s office with no personal use, can be BRP as it is used ‘wholly and exclusively’ for business purposes.
Can a property with mixed use be BRP?
Generally, mixed-use property cannot be BRP. However, there are limited circumstances in which this can occur.
Example of mixed use – not BRP
Fred’s SMSF wants to acquire a property that he believes offers good returns and capital appreciation. His SMSF needs to borrow money to acquire the property. The property has a café downstairs, owned and operated by an unrelated party. Upstairs is a small apartment used and leased by Tim, who is a good tenant and not a related party of the café or Fred’s SMSF.
Unfortunately, Fred’s SMSF is unable to borrow money under an LRBA because the property has mixed residential and business use and is therefore not used ‘wholly and exclusively’ for business purposes.
Dorothy’s SMSF intends to acquire the River Hotel and must do so under an LRBA. Dorothy’s company, River Hotel Pty Ltd, owns and operates the Hotel and is a related party of Dorothy’s SMSF. John is an employee of the company and lives on site. The Hotel rents rooms to short-term travellers as part of its business. John’s use of a room is incidental and relevant to the business, as he provides services to customers on an ad hoc basis and attends to maintenance or other issues on a 24-hour call basis. Dorothy’s SMSF can acquire the Hotel and fund it with an LRBA, as it is considered BRP.