Do you know when your SMSF can borrow for property?

Your Self-Managed Super Fund can still borrow to buy property, but the rules changed in August and the type of property matters more than it used to.

From 10 August 2026, new Limited Recourse Borrowing Arrangements can only be used to acquire business real property. Residential property can no longer be purchased with borrowed funds under a new LRBA, though your fund can still own residential property if you buy it outright or refinance an existing residential LRBA that was in place before the rule change. Commercial property loans through your SMSF remain available, but only when the property meets a specific legal definition and serves the retirement purpose your fund exists to fulfil.

What counts as business real property under SMSF rules

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be one your fund operates. A warehouse leased to an unrelated manufacturing company qualifies. An office building tenanted by a law firm qualifies. A retail shopfront leased to a cafe operator can qualify, provided the entire property is used for that commercial purpose.

Whether a property satisfies the definition depends on its actual use at the time your fund acquires it, not how it is zoned or marketed. A property advertised as commercial does not automatically meet the test. Consider a fund trustee who contracts to buy a small industrial unit in Brendale, north of Brisbane. The unit is marketed as commercial, zoned industrial, and currently leased to a logistics business. That property would meet the business real property definition. If the same trustee then discovers the tenant has been using a rear section of the unit as residential accommodation for staff, the property may no longer be used wholly and exclusively in a business, and the LRBA could fail to meet the legislative requirements.

Mixed-use properties require particularly careful assessment. A property with both a ground-floor retail tenancy and an upstairs residential apartment does not meet the wholly and exclusively test. A concession exists for certain primary production properties where a dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private, but this concession is specific to primary production and does not extend to other property types.

How the sole purpose test applies to commercial property in your fund

Every SMSF investment must be maintained solely to provide retirement benefits to members. Any decision that delivers a present-day benefit to a member or related party risks breaching section 62 of the SIS Act.

In a scenario where a fund trustee who owns a plumbing business uses their SMSF to buy a commercial property, then leases that property back to their own business, the arrangement can comply with superannuation law provided the lease is made on arm's length terms at market value. Business real property leased between the fund and a related party is excluded from the in-house asset rules, which means it does not count toward the 5 percent in-house asset limit, but the lease must reflect what an independent landlord and tenant would negotiate. Rent set below market value to reduce business expenses, or lease terms that favour the member's business over the fund's retirement objective, would breach the sole purpose test.

The sole purpose test applies throughout the life of the investment, not just at acquisition. If the use of a property changes after your fund buys it, the compliance position can change with it. A commercial unit leased to an unrelated business that later becomes vacant and is then used for personal storage by a fund member would breach the sole purpose test during that period of personal use.

Refinancing existing SMSF property loans after the August rule change

The new restrictions do not affect the refinancing of residential LRBAs that existed before 10 August 2026. If your fund held a compliant residential property loan before that date, you can refinance to another lender without the new rules applying to the refinanced arrangement.

Refinancing means entering a new loan contract for the same asset, whether with your current lender or a new one. The arrangement must remain consistent with the original LRBA. A significant change to the terms or beneficiaries of the arrangement can end the original LRBA and create a new one, which would then be subject to the post-commencement rules. Borrowing to acquire an additional asset not contemplated under the original arrangement, or restructuring in a way that changes the ultimate beneficiaries, would likely trigger the application of the new rules.

Refinancing of commercial SMSF loans is not restricted by the August changes. The refinanced loan must still relate to the same single asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms. The ATO publishes safe harbour interest rates each year under Practical Compliance Guideline PCG 2016/5. Income from an LRBA that does not meet arm's length terms may be taxed as non-arm's length income at 45 percent, rather than the concessional 15 percent rate that applies to complying fund income.

LVR limits and how lenders assess commercial SMSF borrowing capacity

Lenders typically offer loan-to-value ratios between 60 and 70 percent for commercial property acquired through an SMSF, which means your fund needs a deposit of at least 30 to 40 percent of the purchase price plus costs. Residential SMSF loans that were established before August often reached 80 percent LVR, but commercial property is assessed differently due to perceived higher risk and lower liquidity.

Borrowing capacity for an SMSF loan is not calculated the same way as a personal home loan. Lenders assess the fund's ability to service the loan based on rental income from the property, existing fund income such as employer and member contributions, and the fund's cash reserves. Some lenders apply a rental income buffer, requiring that rental income alone can service the loan at a stressed interest rate. Others take a whole-of-fund approach and consider all sources of fund income. The structure of your fund, the number of members, the balance of accumulation versus pension accounts, and whether the fund has other investments all influence how a lender views your application.

Variable rates for commercial SMSF loans typically sit above the rates available for residential SMSF loans or standard commercial property loans held outside superannuation. Fixed rate options are available but less common and often come with higher establishment costs. The interest rate your fund pays depends on the LVR, the property type and location, the lease terms and tenant quality if the property is tenanted, and the overall strength of your fund's financial position.

CGT treatment and rental income tax for Queensland commercial property

Rental income received by your SMSF from a commercial property is taxed at 15 percent during the accumulation phase. If the property supports a retirement-phase income stream and the fund's assets are fully segregated as current pension assets, the rental income may be exempt from tax under the exempt current pension income provisions. Where a fund has both accumulation and pension interests, the exemption applies proportionately based on an actuarial certificate.

Capital gains tax applies when your fund sells the property. A complying SMSF is taxed at 15 percent on net capital gains, with a one-third discount available where the property has been held for at least 12 months, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax outcome depends on the property's cost base, capital improvements, selling costs, any capital losses available to offset, and whether the property was supporting a pension at the time of sale. Where the fund uses the proportionate method for ECPI, only a portion of the capital gain may be exempt.

From 1 July 2026, Division 296 tax applies where a member's total superannuation balance exceeds $3 million. An additional 10 percent Division 296 tax applies to balances above $10 million. Division 296 tax is calculated on realised earnings, which include rental income and capital gains. An unrealised increase in property value does not trigger Division 296 tax. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes, which means the loan does not inflate the balance that determines whether the threshold is exceeded. SMSFs were able to elect to adjust the cost base of CGT assets to market value as at 30 June 2026 for Division 296 purposes, which recognised value accrued before the tax commenced.

Holding trust structure and what happens if the loan defaults

The asset your fund acquires under an LRBA must be held in a separate holding trust, commonly called a bare trust. Your SMSF holds a beneficial interest in the asset and gains legal ownership once the loan is repaid. The holding trust cannot be a discretionary trust or a unit trust with multiple unit holders. Your fund must have the right to acquire legal ownership by making one or more payments.

If your fund defaults on the loan, the lender's recourse is limited to the asset held in the trust. The lender cannot pursue other assets of the SMSF. This limited recourse protection is the legislative safeguard that permits borrowing within superannuation. A related party can provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement, not other SMSF assets.

Borrowed funds 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. Multiple real property titles cannot be acquired under a single LRBA unless the properties are distinctly identifiable as a single asset, meaning they have equal market value and are bought and sold together. Separate commercial units on different titles, even in the same complex, cannot be funded under one LRBA. Borrowed funds can cover the purchase price, loan establishment costs, and stamp duty, but cannot be used to improve an existing fund asset or drawn down later for capital improvements.

When to speak with an SMSF specialist before proceeding

SMSF lending sits at the intersection of superannuation law, trust law, tax law, and lending policy. The legislative changes that took effect in August added a further layer of complexity, particularly around transitional arrangements and what constitutes a new arrangement versus a continuation of an existing one. Property that appears commercial may not meet the business real property definition. Lease terms that seem reasonable may not satisfy arm's length requirements. A refinance structured incorrectly may inadvertently trigger the new restrictions.

Before your fund enters into a contract to purchase commercial property or applies for an SMSF loan, seek advice from a licensed SMSF specialist or SMSF auditor. The ATO was still updating some guidance pages as at 10 August 2026 to reflect the new LRBA rules, and the interpretation of specific scenarios continues to develop. Acting on incomplete or outdated information can result in a non-complying LRBA, which exposes your fund to penalties and may jeopardise the tax concessions your fund relies on.

If you are ready to explore whether a commercial loan or SMSF loan aligns with your fund's retirement strategy, call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Queensland to structure lending arrangements that meet both your fund's compliance obligations and your long-term financial goals.

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