Self-managed superannuation funds (SMSFs) are one of the most active buyer cohorts in Australian commercial property under $5 million. The combination of a 15% accumulation-phase tax rate, a 0% rate on pension-phase earnings, and the ability to use a Limited Recourse Borrowing Arrangement (LRBA) to leverage the acquisition has made commercial property a structurally tax-effective long-term hold for many SMSFs.
This guide covers the rules that apply to SMSF commercial property acquisition, the LRBA structure, the single-acquirable-asset rule and the in-house asset rule that constrain what an SMSF can buy, and the practical buyer-side considerations specific to SMSF mandates.
An SMSF is a regulated superannuation vehicle, not a discretionary investment vehicle. Every step of the acquisition must satisfy the sole purpose test, the single-acquirable-asset rule, and the in-house asset rule. The constraints are real, and the audit trail matters.
Why SMSFs Buy Commercial Property
Three structural advantages drive SMSF commercial property activity:
- 15% accumulation tax rate. Rental income in an accumulation-phase SMSF is taxed at 15%, compared with marginal rates up to 47% for individuals.
- 0% pension-phase rate. Income and capital gains derived on assets supporting account-based pensions are tax-free. A property held through transition to retirement and into pension phase compounds at 0% post-tax.
- 1/3 CGT discount. Effective 10% CGT rate on eligible gains in accumulation phase; 0% in pension phase. Compared to the 50% individual discount producing rates up to 23.5%, the SMSF advantage is substantial.
The discipline these advantages create is that the property must be held for a long enough period for the tax benefit to outweigh the constraints of SMSF ownership. Short-hold or active-management briefs are generally unsuitable for SMSF structures.
1 The Sole Purpose Test
The sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993) requires the SMSF to be maintained solely for the provision of retirement benefits to members and their dependants. Every investment decision must be consistent with this purpose.
For commercial property, the sole purpose test typically means the property is held as a passive investment generating rental income. The property cannot be used by members or related parties (with limited exceptions for business real property, discussed below).
2 Business Real Property (BRP)
Business real property is a defined term in the SIS Act. An SMSF can lease commercial property it owns to a related party (the member's own business) where the property is BRP and the lease is on commercial arm's-length terms.
What qualifies as BRP
- The property is used wholly and exclusively in one or more businesses.
- The use is genuine business use, not passive holding.
- Residential property generally cannot qualify (with very limited exceptions for businesses like accommodation operators).
BRP allows what individual property cannot
An SMSF can lease BRP to the member's own business at market rent, without breaching the in-house asset rule. This is one of the most valuable structural advantages for business owners with their own premises.
3 The In-House Asset Rule
Investments in related parties (including loans to, leases to, and investments in entities controlled by members or relatives) are capped at 5% of the SMSF's total assets. Business real property is excluded from this rule (so BRP-leased to related parties is unconstrained), but most other related-party arrangements are caught.
Practical implication: an SMSF can hold a commercial property leased to the member's own business under BRP and not breach the in-house asset rule. The same SMSF cannot lend money to the member or hold a non-BRP commercial property leased to the member's own business above the 5% cap.
4 The Limited Recourse Borrowing Arrangement (LRBA)
SMSFs are generally prohibited from borrowing. The LRBA is the specific structured exception that allows an SMSF to borrow to acquire a single asset.
LRBA structure
- The SMSF establishes a bare trust (also called holding trust) to hold the asset.
- The SMSF directs the bare trust to acquire the asset using funds borrowed from a lender (which can be a commercial bank or a related party).
- The bare trust holds legal title; the SMSF holds beneficial title.
- The lender's recourse is limited to the asset itself; the SMSF's other assets are protected.
- Once the loan is repaid, legal title can be transferred from the bare trust to the SMSF.
The single-acquirable-asset rule
The LRBA can only acquire a single acquirable asset. For real property, this typically means a single title. Acquiring a property with multiple titles requires multiple LRBAs (one per title) or restructuring.
Practical implication: a commercial property on a single title with a single tenant is the clean case. A property with two adjacent titles, or a strata building with multiple separately-titled lots, requires careful structuring to comply.
5 Lender Considerations for LRBAs
Not all commercial lenders offer LRBA finance. The lenders that do typically apply specific terms:
- LVR cap. 65% to 70% maximum for SMSF commercial LRBA. Lower than standard commercial LVR caps.
- Loan term. 15 to 25 year amortising. Shorter than standard commercial loans in some cases.
- Interest cover ratio. Tested against the SMSF's expected rental income plus member contributions.
- Bare trust documentation. Lender requires evidence of correctly structured bare trust before settlement.
- Personal guarantees. Members may be required to provide personal guarantees in addition to the SMSF's borrowing.
6 Buyer-Side DD Specific to SMSF
- Single title verification. Confirm the property is on a single title for LRBA compliance.
- Business real property classification. If the property will be leased to the member's business, the BRP definition must be satisfied.
- Lease structure. Lease must be on arm's-length commercial terms, including market rent supported by independent valuation evidence.
- SMSF investment strategy compliance. The trust deed and investment strategy must permit the acquisition.
- Liquidity check. The SMSF must have sufficient liquid assets to meet member pension payments and other obligations alongside the property.
- Lender appetite. If using LRBA, the lender must be selected and indicative approval obtained before contract.
- Standard commercial DD. All the underwriting that applies to any commercial acquisition: lease, tenant covenant, building, environmental, planning.
7 Common SMSF Commercial Property Pitfalls
Multiple-title properties
A commercial property advertised as one asset can sit on multiple titles. The LRBA single-acquirable-asset rule means each title is a separate acquirable asset. Pre-contract title search is essential.
Improvements during the LRBA term
While the LRBA is in place, the asset cannot be substantively changed (no major improvements that alter the character of the asset). Capital works that exceed normal maintenance can breach the rule and force restructuring.
Related-party leasing at non-arm's-length terms
Leasing BRP to a member's business below market rent (or above) breaches the arm's-length requirement and can trigger non-arm's-length income provisions, taxing the income at 45% instead of 15%.
Insufficient liquidity
An SMSF heavily concentrated in a single commercial property can struggle to meet pension obligations, particularly if rental income is delayed or the property is vacant. The SMSF's investment strategy must address liquidity.
Frequently Asked Questions
Can I lease the SMSF property to my own business?
Yes, if the property qualifies as business real property and the lease is at arm's-length commercial terms. The BRP exception is one of the principal reasons SMSFs hold commercial property.
Can I use member contributions to pay down the LRBA?
Yes, subject to the SMSF's investment strategy and the contribution caps. Member contributions can be directed to debt reduction over time, accelerating debt-free pension-phase ownership.
What happens when the loan is paid off?
Legal title can be transferred from the bare trust to the SMSF without triggering stamp duty in most states (specific concessional treatment applies). The SMSF then owns the asset directly.
Can I sell the property out of the SMSF later?
Yes. Disposal triggers CGT in the SMSF (10% in accumulation phase, 0% in pension phase). The asset must not be transferred to a related party except at arm's-length market value, and even then the buyer-side restrictions on residential property apply.