Understanding the basics of SMSF property loans

Your Self-Managed Super Fund can still borrow to buy property, but the rules changed in August.

If you're thinking about using your super to buy an investment property, you need to know that residential borrowing through your SMSF stopped being available for new loans from 10 August this year. From that date, Limited Recourse Borrowing Arrangements for real property can only be used to acquire business real property. Your SMSF can still own residential property and can buy it outright without a loan, but you can't take out a new loan to purchase it.

This doesn't mean SMSF property investment is over. The restriction does not prohibit SMSFs from owning or acquiring residential property. It just means you need enough in your fund to buy without borrowing, or you need to look at commercial property instead.

What is a Limited Recourse Borrowing Arrangement?

Borrowing is generally prohibited for superannuation funds, but sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 provide an exception through the limited recourse borrowing arrangement. Under this structure, the property is held in a separate holding trust while your SMSF makes loan repayments. The SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid.

The reason it's called limited recourse is that if the loan defaults, the lender can only recover the property held in the trust. They can't go after other assets in your super fund. If the loan defaults, only the asset held in trust is at risk. Rental income and capital growth from the property flow to your SMSF during the loan period.

Consider someone with a super balance who wants to purchase a commercial unit. Their SMSF enters into an LRBA, the property is held in a bare trust, and the fund services the loan from rental income and any additional contributions. Once the loan is repaid, legal title transfers to the SMSF trustee. If the loan had defaulted partway through, only the commercial unit would have been at risk, not the member's other super assets.

Can you still borrow to buy commercial property through your SMSF?

Yes. LRBAs for commercial property that satisfies the definition of business real property are not affected by the changes commencing 10 August 2026. This is where the focus has shifted for anyone wanting to use borrowing within their super fund.

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be yours. You could buy a warehouse leased to a logistics company, a retail shopfront leased to a cafe, or an office leased to an accounting firm. What matters is that the property is being used for business purposes, not as someone's home.

Whether a property satisfies the definition depends on its actual use at the time of acquisition and is a question of fact. A property listed as commercial in a real estate advertisement doesn't automatically qualify. If a building has a commercial shopfront on the ground floor and a residential apartment upstairs, that creates a problem. Mixed-use properties require careful assessment based on the nature and actual use of the property. You'll need advice from an SMSF specialist before committing to any purchase.

How much can you borrow and what deposit do you need?

Most lenders offering SMSF loans require a deposit of at least 30 to 35 percent, which means the loan-to-value ratio sits around 65 to 70 percent. Some lenders will go higher depending on the property type, location, and your fund's financial position, but that's less common.

The borrowing capacity of your SMSF depends on the rental income the property generates, any other income in the fund, and the contributions you're making. Lenders assess serviceability differently than they do for a standard home loan. They're not looking at your personal income. They're looking at whether the fund itself can service the debt from rent, contributions, and existing fund income.

If your SMSF has a balance that can cover the deposit and associated costs, and the rental yield on the commercial property is strong enough to cover or partially cover loan repayments, the structure can work. You may need to make regular contributions to top up serviceability, depending on how the numbers sit.

What happens to existing residential SMSF loans?

The changes do not apply where an SMSF exchanges a binding contract to acquire real property before 10 August 2026. If you exchanged contracts before that date, you're protected even if settlement happened after.

The changes also do not impact arrangements existing prior to 10 August 2026 or the refinancing of those arrangements. If you already have a residential SMSF loan in place, you can keep it and you can refinance it to another lender if you find a lower rate or want different loan terms.

What you can't do is take the equity in that residential property and borrow again to buy another residential property. The new borrowing rules would apply to any new loan entered into from 10 August onward.

How does tax work on rental income and capital gains in an SMSF?

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. That applies to rental income and to any capital gain when you sell the property. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain.

Once your SMSF is in pension phase, the tax treatment improves further. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income. 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 your fund has both accumulation and pension accounts, the tax exemption applies proportionately. The exact outcome depends on how your fund is structured, whether you've met minimum pension payment requirements, and whether you need an actuarial certificate.

What are the risks and restrictions you need to know about?

You can't live in a property owned by your SMSF, and neither can anyone related to you. You can't buy the property from a related party, and you can't sell it to one either. The property must be maintained solely to provide retirement benefits, which is called the sole purpose test.

The borrowed money 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. You can't bundle multiple properties into one loan. Borrowed funds cannot be used to improve an existing asset. If you want to renovate or extend the property, you'll need to fund that from the SMSF's own cash reserves or from contributions.

If you lease a commercial property to a related party, the lease must be at market rent and on arm's length terms. The ATO publishes safe harbour interest rates each year. If your SMSF loan doesn't meet those rates or can't justify a commercial alternative, the income may be classified as non-arm's length income and taxed at 45 percent instead of 15 percent.

Who should consider an SMSF loan for commercial property?

This structure suits people with meaningful super balances who want control over their retirement assets and are prepared to manage the compliance obligations that come with running an SMSF. It's not a shortcut to buying investment property with a smaller deposit. The deposit requirement is higher, the loan structure is more complex, and you'll need ongoing advice from an accountant and potentially a financial planner.

If you're a single income earner still building your super balance, you're usually in a position where contributing more to super and letting that grow in a diversified fund makes more sense than locking up your balance in one property with a loan attached. SMSF property works when you have enough in the fund to comfortably meet the deposit, cover all the setup and ongoing costs, and still have liquidity for other expenses or opportunities.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can walk you through whether this structure makes sense for your situation, what lenders are available, and how the numbers would work based on your fund balance and the property you're considering.

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