SMSF Commercial Property & LRBA Explained

Self-managed superannuation funds (SMSFs) are one of the most active buyer cohorts in Australian commercial property under $5 million. A 15% accumulation-phase tax rate, a 0% rate on pension-phase earnings, and the ability to fund the purchase through a Limited Recourse Borrowing Arrangement (LRBA) make commercial property a structurally tax-effective long-term hold for many funds.

The catch is that an SMSF is a regulated superannuation vehicle, not a discretionary investment vehicle. The sole purpose test, the single-acquirable-asset rule and the in-house asset rule govern what the fund can buy and how it can hold it, and the audit trail matters at every step. Get the structure wrong and the tax advantage disappears.

Why SMSFs Buy Commercial Property

The pull is tax. Rental income in an accumulation-phase SMSF is taxed at 15%, against marginal rates of up to 47% for individuals. Once a member moves into pension phase, income and capital gains on assets supporting an account-based pension are tax-free, so a property held through transition to retirement and into pension phase compounds at 0% post-tax. Capital gains get the same treatment: the one-third CGT discount gives an effective 10% rate on eligible gains in accumulation phase and 0% in pension phase, against the 50% individual discount that still leaves rates as high as 23.5%.

The discipline this creates is holding period. The property has to be held long enough for the tax benefit to outweigh the constraints of SMSF ownership, so short-hold or active-management briefs are generally unsuitable for SMSF structures.

1 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 that purpose.

For commercial property, that usually means the property is held as a passive investment generating rental income. It 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. For a business owner who occupies their own premises, this is one of the most valuable structural advantages available.

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 sits outside this rule, so BRP leased to related parties is unconstrained, but most other related-party arrangements are caught.

So an SMSF can hold a commercial property leased to the member's own business under BRP and stay clear of the in-house asset rule. The same fund 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 lets a fund borrow to acquire a single asset.

LRBA structure

• The SMSF establishes a bare trust, also called a 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, so 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

An LRBA can only acquire a single acquirable asset. For real property, that typically means a single title. Acquiring a property with multiple titles requires multiple LRBAs, one per title, or restructuring.

The clean case is a commercial property on a single title with a single tenant. A property spread across two adjacent titles, or a strata building with multiple separately-titled lots, needs careful structuring to comply.

5 Lender Considerations for LRBAs

Not every commercial lender writes LRBA finance. Those that do tend to apply their own 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. The lender requires evidence of a 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

1. Single title verification. Confirm the property is on a single title for LRBA compliance.
2. Business real property classification. If the property will be leased to the member's business, the BRP definition must be satisfied.
3. Lease structure. The lease must be on arm's-length commercial terms, with market rent supported by independent valuation evidence.
4. SMSF investment strategy compliance. The trust deed and investment strategy must permit the acquisition.
5. Liquidity check. The SMSF must hold enough liquid assets to meet member pension payments and other obligations alongside the property.
6. Lender appetite. If using an LRBA, select the lender and obtain indicative approval before contract.
7. 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. Under the LRBA single-acquirable-asset rule, each title is a separate acquirable asset, so a pre-contract title search is essential.

Improvements during the LRBA term

While the LRBA is in place, the asset cannot be substantively changed, meaning no major improvements that alter the character of the asset. Capital works beyond normal maintenance can breach the rule and force a restructure.

Related-party leasing at non-arm's-length terms

Leasing BRP to a member's business below market rent, or above it, breaches the arm's-length requirement and can trigger the non-arm's-length income provisions, taxing that 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 sits vacant. The fund's investment strategy has to 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, within the SMSF's investment strategy and the contribution caps. Directing member contributions to debt reduction over time brings forward debt-free pension-phase ownership.

What happens when the loan is paid off?

Legal title transfers from the bare trust to the SMSF, and in most states that transfer does not trigger stamp duty (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, at 10% in accumulation phase and 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.