Borrowing In Super To Buy Commercial Property

Since 2007, legislative changes have made it impossible for a self‑managed super fund (SMSF) to borrow to acquire property, using a Limited Recourse Borrowing Arrangement (LRBA). While this strategy was well known for residential property, it now only applies (just as effectively) — and in some ways more powerfully — to commercial property.

Investing in a commercial (or “business real”) property through your SMSF gives you greater control over your retirement savings, the ability to hold an asset (even leased to your company or to other tenants), and access to tax settings inside super that are generally more favourable than holding the same property in your own name.

The Power of Leverage: A Commercial Property Example

Leverage simply means using borrowed funds — other people’s money — to control a larger asset than your super balance alone would allow, so that both capital growth and rental income are earned on the full value of the property, not just your deposit.

Here’s an illustrative example based on a $780,000 commercial property:

Tax Advantages Worth Discussing With Your Adviser

A licensed financial planner and accountant should walk you through how the following apply to your circumstances:

• Capital gains tax concessions
• Rental income tax treatment inside super
• Salary sacrifice contributions to boost repayment capacity
• Superannuation pension‑phase tax treatment
• Depreciation deductions — commercial properties often offer stronger depreciation benefits than residential, through both capital works allowances and plant & equipment

Key Tax Benefits

Rental income earned inside an SMSF in accumulation phase is generally taxed at 15%, compared to marginal tax rates of up to 47% (including Medicare levy) if the same property were held in your personal name.

If the property is sold while the fund is in accumulation phase, after being held for more than 12 months, a discounted capital gains tax rate of 10% applies. Once the fund has moved into pension phase, both rental income and any capital gain on sale can be taxed at 0%.

Related-Party Leasing: A Unique Commercial Property Advantage

This is where commercial property stands apart from residential property in an SMSF. Superannuation law prohibits an SMSF from leasing residential property to a member or related party — but commercial (business real) property is different.

Subject to strict rules — the lease must be a formal, arm’s-length agreement at market rent — an SMSF can lease commercial property to a related party, including the member’s own trading business. In practice, this means a business owner can have their business pay market rent into their own super fund, rather than to an external landlord, while building retirement savings and long-term ownership of the premises the business operates from.

Getting this structure right matters. We recommend obtaining specialist SMSF, legal and tax advice to ensure any related-party lease satisfies the business real property and arm’s-length requirements.

Setting Up the Borrowing Structure

An LRBA requires the property to be held in a separate bare trust, custodian trust or security trust until the loan is repaid, at which point ownership can be transferred to the SMSF. Commercial property purchases must also satisfy the “single acquirable asset” and “business real property” tests.

Because the rules around SMSF borrowing are strict and the consequences of getting them wrong can be significant, we strongly recommend engaging specialist SMSF, legal and finance advice before signing any contract.

How We Help

With over 19 years of property consulting experience, backed by a background in financial planning, we help SMSF trustees source and select commercial property that is matched to their individual investment strategy and retirement goals, sourced Australia-wide.