Everything you need to know about SMSF property loans

Buying a smaller dwelling through your self-managed super fund used to be an option if you wanted to start with something manageable and build from there.

That changed on 10 August. The Treasury Laws Amendment inserted a new condition into the SIS Act that restricts limited recourse borrowing arrangements for real property to business real property only. You can still own residential property in your SMSF if you buy it outright or if you had a contract in place before the cutoff date. But if you're looking at a smaller dwelling now and need a loan, the residential route is closed.

Commercial property is still on the table. The restriction doesn't touch business real property, and that includes smaller commercial assets like standalone offices, small warehouses, or retail units. The definition hinges on actual use, not the marketing label or the size of the building.

What Counts as Business Real Property in an SMSF

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be yours. A tenant can operate the business, and the property still qualifies as long as the use is genuinely commercial and nothing else.

A small office leased to an accounting firm qualifies. A shopfront leased to a cafe qualifies. A warehouse leased to a logistics company qualifies. A duplex with one side leased as office space and the other side used as a residence does not qualify because the use isn't exclusive to business.

The ATO's position in SMSFR 2009/1 makes it clear that mixed use is a problem. If part of the property is residential, you need specific advice on whether the whole property fails the test or whether only part of it qualifies. For most FIFO workers looking at a straightforward purchase, the answer is to avoid anything with a residential component unless you're buying primary production property with specific exemptions.

Consider a mining engineer with an SMSF balance around $280,000 who wants to acquire a small commercial unit. The property is a 90-square-metre office in a suburban commercial precinct, tenanted by a physiotherapy practice, priced within range of the fund's borrowing capacity. The property is leased on commercial terms, zoned commercial, and used exclusively for the physiotherapy business. That use satisfies the business real property definition, and the LRBA can proceed under the current rules.

Loan Conditions That Still Apply After August

The LRBA structure hasn't changed. The borrowed money must be used to acquire a single asset. The asset is held in a bare trust, and the SMSF trustee holds a beneficial interest in it. Legal ownership transfers to the SMSF once the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset in the trust, not the rest of the fund.

You can't borrow to improve the property. Loan funds can cover the purchase price, stamp duty, and loan establishment costs, but not renovations or capital works. You can't put an existing fund asset into an LRBA. The asset can't be subject to any other charge.

Deposit requirements for SMSF loans for FIFO workers typically sit between 20 and 30 percent of the purchase price, depending on the lender and the property type. Some lenders will go to 80 percent LVR for commercial property, others cap it at 70 percent. Variable rate loans are more common than fixed rate loans in the SMSF space, and rates are generally higher than standard residential mortgages.

How Capital Gains Tax Works When You Sell

A complying SMSF is taxed at 15 percent on assessable income, including net capital gains. If the property has been held for at least 12 months, a one-third CGT discount applies, which can produce a maximum effective rate of 10 percent on the discounted gain.

If the property supports a pension and the fund's assets are fully segregated as current pension assets for the entire income year, the capital gain is disregarded. From the 2022 financial year, a fund paying only retirement phase pensions throughout the year is treated as having segregated current pension assets.

If the fund has both accumulation and pension interests, the exempt current pension income exemption is partial. The proportion depends on an actuarial certificate, whether minimum pension payments were met, and the fund's specific circumstances for that year.

In the earlier example, assume the mining engineer holds the commercial unit in accumulation phase for eight years, then starts a pension. The property is sold three years later while supporting the pension. The fund has no accumulation interests at that time. The capital gain is disregaged, and no CGT is payable on the sale.

Division 296 Tax and Property Held in Your SMSF

From 1 July this year, Division 296 tax applies where a member's total superannuation balance at the end of the financial year exceeds $3 million. An additional 10 percent applies to balances above $10 million. Both thresholds are indexed annually.

Division 296 fund earnings are based on an adjusted amount of the fund's taxable income. Rental income and realised capital gains contribute to the calculation. Unrealised increases in property value do not trigger a CGT event and do not form part of the Division 296 earnings base until the property is sold.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes. The outstanding loan balance is excluded from the balance calculation, so a property purchased with an LRBA contributes only the fund's equity in the property, not the full market value.

An SMSF could elect to adjust the cost base of CGT assets to market value as at 30 June to recognise value accrued before Division 296 commenced. The election applied to all CGT assets held directly by the SMSF at that date, couldn't be revoked, and had to be made by the due date of the annual return. Members didn't need to be over the threshold for the fund to make the election.

Related Party Leasing and Arm's Length Terms

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. The lease must be made on arm's length terms at market value.

If you own a business and your SMSF owns the premises, you can lease the property to your business. The rent must reflect what an independent tenant would pay for comparable premises in that location. The ATO will look at whether the lease terms, rent reviews, and outgoings are consistent with commercial practice.

If the lease isn't at arm's length, the income may be classified as non-arm's length income and taxed at 45 percent. The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5, updated annually. These rates apply to both real property and listed securities, and the guideline applies regardless of whether the arrangement commenced before or after publication.

Refinancing an Existing SMSF Loan

If you had a residential LRBA in place before 10 August, you can refinance it to another lender without the refinanced arrangement being subject to the new rules. The ATO considers refinancing to mean entering into a new loan contract for the same asset, with the same or a new lender.

A significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Refinancing that is inconsistent with the original arrangement, borrowing to acquire a different asset, or changes to the ultimate beneficiaries can all end an existing arrangement. A new arrangement entered into on or after 10 August that involves residential property would be caught by the new rules and couldn't proceed.

Commercial LRBA refinancing is not affected by the changes. Compliance conditions continue to apply, including that the refinanced loan must relate to the same single asset, maintain the limited recourse character, and meet arm's length terms.

What This Means for FIFO Workers with Super Balances Under $300,000

If your SMSF balance is under $300,000 and you were considering a smaller residential property with a loan, that option is no longer available unless you had a contract before 10 August. You can still buy residential property outright if you have enough in the fund, or you can look at commercial property with an LRBA.

Commercial property at the lower end of the market tends to be small offices, retail units, or industrial units in suburban precincts rather than CBD locations. These properties are often tenanted by sole traders, small businesses, or professional services. Vacancy risk and tenant quality are the main considerations, and location matters more than it does for residential property because commercial tenants are more sensitive to access, visibility, and local demographics.

If you're holding super in a retail or industry fund and considering an SMSF to get into property, the setup and ongoing costs need to justify the decision. An SMSF with a single commercial property and a balance under $300,000 will have proportionally higher administration and compliance costs than a larger fund. The property needs to generate enough rental income to cover loan repayments, outgoings, and fund expenses, and still meet the sole purpose test.

You can also explore options like investment loans for FIFO workers outside the super environment if the SMSF structure doesn't suit your circumstances. Borrowing capacity, deposit requirements, and taxation differ, and the right structure depends on your income, existing debts, and what you're trying to achieve over the next ten to fifteen years.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can refer you to licensed advisers who can assess whether an SMSF loan fits your situation or whether another structure makes more sense given the August changes.

Frequently Asked Questions