How does Commercial Property work in an SMSF?
An SMSF can continue to purchase residential or commercial property. However, the government has effectively banned the purchase of residential property financed using a limited recourse borrowing arrangement (LRBA). The ban applies to non-business real property from 10 August 2026.
For most people, borrowing to invest in business real property (BRP) relates to commercial property. However, commercial property, which may also include a private residence or personal use, may not meet the requirements for BRP. The ATO takes a practical approach when assessing whether commercial property aligns with the definition of BRP (see SMSFR 2009/1). Personal use may be ignored if it is trifling and insignificant. For example, the ATO may ignore a manager living onsite in a motel if this is considered part of the motel business.
How can my SMSF acquire commercial property using an LRBA
An LRBA is more than a standard commercial property loan. There are strict criteria under SIS rules that an SMSF must meet to allow the fund to borrow, including the following:
- Limited Recourse Loan
To enable a lending institution to hold a charge or mortgage over the property, the fund’s other assets must be protected. The lender’s recourse is limited to the property purchased by the SMSF. In addition, personal guarantees are typically used, allowing the lender to seize your personal assets if the sale of the property does not fully cover the remaining loan balance in the event of a fund default.
- Separate legal entity
A separate legal entity, typically a bare or custodian trust, holds the property on behalf of the SMSF whilst the borrowings are in place. The custodian legally owns the property, and the SMSF is the beneficial owner. This means the custodian’s name appears on the title, a lease agreement and on rates notices, but the SMSF is entitled to the rental income, must pay the rental expenses, remit GST (if applicable), pay income tax and arrange the loan, and is responsible for the repayments. The custodian’s only role is to legally hold the asset.
The agreement with the custodian must allow for the SMSF to have the legal title of the property transferred to the SMSF after the loan has been fully repaid. Title transfer is not automatic, and legal ownership remains with the custodian until a formal transfer is executed and registered.
- Borrowed money
Borrowings can be used only to acquire the property. However, some minor costs, such as stamp duty, loan establishment costs, conveyancing fees and other property acquisition costs, can be paid from borrowings. Repairs and maintenance can be paid from borrowings, but lenders don’t always allow loan redraws for this purpose. Borrowings cannot be used for improvements (other fund cash can be used for this purpose instead).
- The property must be a single acquirable asset
Generally, this means a property can only have one title. There are exceptions such as a factory or warehouse which physically sits over more than one title.
- The property cannot be changed into something else
Substantial changes made to a property under an LRBA, changing it into something else, are prohibited and can include:
- subdividing the property and building a new office or warehouse,
- building a house on vacant land – unless you had existing land before the LRBA ban became effective, it is unlikely the fund could own vacant land under an LRBA,
- demolishing an existing house and replacing it with several townhouses, and
- substantial renovation made to a residential building changing it from, say, a three-bedroom home into a property with a restaurant with a commercial kitchen and seating for diners.
SMSF LRBA loan terms for commercial property
An SMSF can borrow from a bank or other lender to acquire eligible commercial property that also complies with the requirements of BRP.
Loans for commercial property are generally considered higher risk than those for residential property, and the terms and conditions reflect this additional risk. Most major banks do not offer commercial loans to SMSFs, but lenders such as BOQ Specialists, Macquarie, La Trobe and others may lend to SMSFs.
Another alternative is a related party loan. The ATO has provided “safe harbour guidelines” setting out terms and conditions which they will accept as meeting the arm’s length requirements.
| Loan terms & conditions | Details |
| Maximum Loan-to-Value Ratio (LVR) | 70% |
| Interest Rate | Per the Reserve Bank of Australia indicator lending rates for providing standard housing loans for investors for the month of May immediately prior to the start of the relevant financial year. The interest rates must be updated annually.
The interest rate for 2026/27 is 9.35% p.a (for 2025/26 it was 8.95%) |
| Maximum loan term | 15 years maximum |
| Loan type | Variable – use interest rate per above; Fixed – interest rate can be fixed for a period up to 5 years and is based on the May interest rate immediately prior to the start of the relevant financial year |
| Frequency of repayments | Payments made monthly and must include both interest and principal |
| Security | Registered mortgage |
| Loan agreement | Must be written and executed |
| Personal guarantees | Not required |
Commercial lenders may have better rates than the above and should be investigated as part of the trustee’s decision-making.