Beginner's guide to SMSF retail property loans

Can an SMSF still borrow to buy a retail shop or commercial property?

Yes, an SMSF can borrow to purchase retail property that qualifies as business real property. From 10 August 2026, LRBAs entered into to purchase real property can only be used to acquire business real property, but this restriction does not apply to commercial premises used wholly and exclusively in one or more businesses. The change removed the option to borrow for residential property, but retail shops, warehouses, and other commercial premises remain fully accessible through a Limited Recourse Borrowing Arrangement.

Consider a Brisbane-based SMSF with three members in accumulation phase. The fund has $580,000 in liquid assets and identifies a small retail shop in Newstead being leased to a café operator on a three-year commercial lease. The property is used wholly for the café business. The fund arranges a commercial SMSF loan at 70 percent LVR, borrows $420,000, and combines it with the fund's cash to complete the purchase. The property is held in a bare trust until the loan is repaid, and rental income flows to the SMSF. This structure remains compliant because the property meets the business real property definition under the SIS Act.

What counts as business real property for SMSF borrowing?

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the SMSF itself. A retail shop leased to a tenant who operates a florist, bookshop, or physiotherapy clinic would typically satisfy the definition, provided the premises are used exclusively for that business and not for private or residential purposes.

Whether a property qualifies depends on how it is actually used at the time of acquisition. A property marketed as commercial does not automatically meet the definition if part of it is used for residential purposes. In our experience, this is where careful due diligence matters. A mixed-use building with a shopfront on the ground floor and a residential apartment above may not qualify in full, or at all, depending on how the property is structured and whether it can be separated for valuation and use purposes.

How does the holding trust structure work for commercial property?

The asset is held in a separate holding trust, and the SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. A bare trust is the most common structure. The trustee of the bare trust holds legal title to the property, and the SMSF trustee holds the beneficial interest. Rental income and capital growth flow to the SMSF, and the fund makes loan repayments from its cash flow or contributions.

If the loan defaults, only the asset held in the trust is at risk. The lender has no recourse to other SMSF assets. This limited recourse character is a condition of compliance and must be maintained throughout the life of the loan, including if the fund later refinances with another lender.

Can an SMSF lease a retail property to a related party?

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules, provided any such lease is made on arm's length terms at market value. An SMSF could acquire a retail shop under an LRBA and lease it to a company controlled by a fund member, as long as the rent charged is consistent with what an independent tenant would pay for the same premises.

This arrangement requires supporting evidence. A rental appraisal from a licensed property manager or valuer is one way to demonstrate that the lease reflects market terms. The SMSF must also satisfy the sole purpose test at all times, meaning the fund cannot be maintained to provide a present-day benefit to a member or related party. Charging below-market rent to support a related business would breach that test.

What loan to value ratios and deposit requirements apply?

Most SMSF lenders will lend up to 70 percent LVR for commercial property, though some offer 80 percent depending on the asset type, location, and tenant profile. A fund looking to borrow $400,000 for a retail property would typically need at least $171,000 in cash or liquid assets to cover the deposit and settlement costs, assuming 70 percent LVR.

Deposit requirements are higher than for residential lending, and lenders also assess the fund's ability to service the loan. Rental income, concessional contributions, and investment returns are all considered when determining borrowing capacity. Where the property is vacant at settlement, lenders may require evidence of a tenant or a larger deposit to account for the additional risk.

How is rental income taxed in accumulation and pension phase?

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Rental income received by an SMSF in accumulation phase is taxed at 15 percent, and loan interest is deductible against that income. Where the fund also has a member in pension phase, part of the rental income may be tax-exempt, depending on whether the fund's assets are segregated or proportionate.

Where a fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal of those assets is disregarded. If the SMSF sells the retail property after the member has moved into pension phase and all fund assets are supporting retirement income streams, the capital gain may be entirely tax-exempt. Where the fund has both accumulation and pension members, an actuarial certificate is typically required to determine the exempt proportion.

Does Division 296 tax apply to SMSF property earnings?

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds the large super balance threshold of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the threshold. Rental income and realised capital gains may contribute to the Division 296 earnings calculation. An unrealised increase in property value does not by itself trigger Division 296 tax, as no CGT event has occurred.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. If an SMSF holds a $600,000 retail property with a $420,000 loan against it, only the net equity of $180,000 is included in the member's balance. This treatment reduces the likelihood that a member with a leveraged property holding will exceed the $3 million threshold purely due to the gross value of the asset.

Can an SMSF refinance a commercial property loan?

Refinancing of commercial LRBA arrangements is not affected by the 2026 changes. A fund that borrowed three years ago to buy a retail shop in Fortitude Valley can refinance to another lender to access a lower interest rate or better loan terms. The refinanced loan must relate to the same asset, maintain the limited recourse character, and meet arm's length terms.

The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5, updated annually. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate of 45 percent. Where the lender is a related party, the interest rate charged must fall within the published safe harbour range or be supported by independent evidence that it reflects commercial terms.

What happens if the SMSF cannot make loan repayments?

If the loan defaults, only the asset held in trust is at risk. The lender's recourse is limited to the retail property itself. Other SMSF assets, including shares, cash, or additional properties held outside the LRBA, are protected. This limited recourse feature is a core compliance requirement and applies whether the lender is a bank, non-bank lender, or related party.

A related party can provide a personal guarantee to support the loan, but their recourse must also be limited to the asset under the arrangement. The guarantee cannot extend to other SMSF assets. This structure provides some protection for the SMSF while allowing members or related entities to support the borrowing in a compliant way.

If you're considering a retail property purchase through your SMSF or want to review your fund's existing commercial loan arrangement, call one of our team or book an appointment at a time that works for you.

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