SMSF + LRBA: How to Finance a Commercial Property Purchase

Buying commercial property through your Self Managed Super Fund (SMSF) can be a powerful long-term investment strategy — one that offers tax benefits, asset protection, and control. For business owners who value security and strategic wealth building, using your super to acquire commercial or industrial property may seem like a good investment decision.

But how do you actually finance the purchase?

This is where a Limited Recourse Borrowing Arrangement (LRBA) comes in. It allows your SMSF to borrow money to buy property while limiting the lender’s claim to the asset itself — not your other SMSF assets.

In this article, we explain everything you need to know about financing commercial property using an LRBA through your SMSF: from structure and compliance to tax benefits, costs, and risks.

Why Buy Commercial Property with Your SMSF?

There are several reasons business owners turn to their SMSF for commercial property investment:

Pay rent to your own fund

Your business can lease the property from your SMSF at market value — turning rent into retirement savings.

Tax advantages

Rental income and capital gains earned inside the SMSF are taxed at a maximum of 15%, or potentially 0% in pension phase.

Asset protection

Property held in your SMSF is generally protected from creditors, adding a layer of financial security.

Diversification

Property is a tangible asset that can diversify your super portfolio beyond shares and cash.

Provided the sole purpose test is met (i.e. the fund is solely providing retirement benefits), this strategy is fully compliant with Australian superannuation law.

Understanding Limited Recourse Borrowing Arrangements (LRBAs)

An LRBA is a special type of loan that allows an SMSF to borrow money to purchase a single acquirable asset — in this case, a commercial property.

Here’s how it works:

1. The property is held in a bare trust (also known as a holding trust) on behalf of the SMSF.
2. The SMSF pays the deposit and borrows the balance through a lender (bank or private lender).
3. Loan repayments — including interest — are made by the SMSF, typically from rental income and SMSF contributions.
4. Once the loan is fully repaid, the legal ownership of the property transfers to the SMSF.

The key feature of an LRBA is that the lender’s recourse is limited to the asset itself. If the SMSF defaults, the lender cannot access other SMSF assets like shares or cash.

This structure offers protection but also requires tight compliance with ATO regulations, particularly around who provides the loan, the interest rate charged, and whether the terms reflect an arm’s-length arrangement.

Compliance Considerations: Sole Purpose Test, SMSF Trustees, and the ATO

Before diving in, it’s vital to understand the compliance rules enforced by the Australian Taxation Office (ATO):

1. Sole Purpose Test

Your SMSF must exist solely to provide retirement benefits. That means the property can’t be used by you, your relatives, or your business unless it’s leased at market value under a commercial lease.

2. Related Parties and Arm’s-Length Terms

If you’re borrowing from a related party (e.g. yourself or a related trust), the Safe Harbour Guidelines set out by the ATO must be followed to ensure the arrangement reflects commercial terms.

3. Fund Trustees

All decisions must be made by the SMSF trustees, and formal documentation is critical.

You’ll need:

• A declaration of trust for the bare trust
• A loan agreement
• Evidence of market value rent
• Documentation showing loan repayments and expenses

How to Structure Your SMSF Commercial Property Loan

Getting the loan structure right is essential for both compliance and cash flow.

Key steps:

1. Set up the SMSF and corporate trustee (if not already established).
2. Establish a bare trust (or holding trust) in a separate legal entity.
3. Source your loan: Choose between bank financing or related-party lending.
4. Review LVR (Loan-to-Value Ratio): Most lenders allow a maximum LVR of 70%, meaning your SMSF will need at least 30% of the purchase price plus costs (stamp duty, legal fees, etc.) in available SMSF funds.
5. Loan terms:
   • Interest rates must be at arm’s length.
   • Repayments are typically principal & interest (P&I) over 15 years.
   • SMSF cash flow must cover repayments, property expenses, and contribution caps.

If rental income is insufficient, member contributions (within concessional and non-concessional caps) can be used to meet repayments.

Key Costs Involved in Financing Commercial Property through an SMSF

Investing via an SMSF + LRBA comes with a range of setup and ongoing costs, including:

• Deposit (typically 30%)
• Stamp duty on the purchase price
• Legal fees for SMSF deed amendments, trust setup, and contracts
• Ongoing loan repayments
• Property management fees
• Valuations and accounting to meet SMSF compliance
• Independent financial adviser fees (if applicable)

It’s essential to factor in sufficient liquidity in the fund — particularly if the property becomes vacant or unexpected repairs arise.

Tax Benefits and Obligations

SMSF property investments enjoy a range of tax incentives, but they must be carefully managed.

1. Rental Income

• Taxed at a maximum of 15% while the fund is in accumulation phase
• Tax-free in pension phase

2. Capital Gains Tax (CGT)

• Property held >12 months: CGT discounted by 33%
• In pension phase: CGT may be entirely tax-free

3. Other Considerations

• You cannot claim negative gearing against personal taxable income.
• Property depreciation deductions are allowable to the SMSF only.
• Stamp duty may apply both on acquisition and at trust vesting if not structured correctly.

Purchasing commercial property through your SMSF using an LRBA can be a smart, tax-effective way to grow your retirement savings — especially for business owners seeking long-term stability and control.

However, it’s not without complexity. From loan structuring and compliance to market value leases and trustee responsibilities, professional advice is essential.

At Causbrooks Finance, we specialise in SMSF lending and property structuring. If you’re ready to take the next step in securing your business premises or investing in commercial real estate through your super, reach out to book a complimentary consultation.

‍