Self-Managed Super Funds can borrow to acquire commercial property through a Limited Recourse Borrowing Arrangement, provided the loan is structured correctly and the property meets the sole purpose test.
What Is a Limited Recourse Borrowing Arrangement for Commercial Property?
A Limited Recourse Borrowing Arrangement allows your SMSF to borrow funds to purchase a single commercial property, held in a bare trust until the loan is repaid. The lender's recourse is limited to the property itself, meaning your other fund assets remain protected if the loan defaults. Each LRBA covers one property only, so acquiring two commercial premises requires two separate arrangements, each with its own bare trust structure and loan documentation.
Consider a fund with $600,000 in existing assets looking to acquire a warehouse in Malaga. At 80% LVR, the fund could borrow up to $320,000 against a $400,000 purchase, requiring $80,000 from the fund as a deposit. The warehouse is held in a bare trust, legally separated from the fund's other holdings. Once the loan is cleared, the property transfers into the fund's direct ownership.
LVR and Deposit Requirements for Commercial SMSF Loans
Non-bank and specialist lenders now offer LVRs up to 80% for commercial property, a significant shift from the historically conservative range of around 60% to 70%. Higher LVRs reduce the upfront capital required from the fund, but also tighten serviceability requirements. Lenders assess rental income, fund cash flow, and the trustee's capacity to meet repayments without breaching liquidity ratios.
A fund purchasing a $500,000 commercial unit in Osborne Park at 70% LVR would need $150,000 plus acquisition costs, leaving sufficient liquidity to cover holding costs if tenancy gaps occur. At 80% LVR, the deposit drops to $100,000, but the fund must demonstrate stronger income or contribution capacity to service the higher debt.
The Sole Purpose Test and Related-Party Leasing
The property must exist purely to generate retirement benefits for fund members. Personal use is prohibited. SMSFs are restricted from holding more than 5% of their total assets in in-house assets, which includes property leased to a related party unless an exception applies. Leasing commercial property to a related business is permissible provided the lease is on arm's length terms and rental is at market rates.
A trustee operating a family business can lease a commercial premises owned by the SMSF to that business, provided an independent valuation supports the rental rate and the lease agreement is documented formally. This arrangement is common in Perth, particularly among trades, medical, and professional services where business owners seek to secure their operating premises within their super structure.
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Structural Improvements and Property Modifications
You cannot use the LRBA to fund structural improvements or anything that changes the fundamental character of the property while the loan is outstanding. Repairs and maintenance are permitted, but structural changes such as subdivision, adding mezzanine levels, or converting use class are not. If the property requires capital works, these must be funded from the SMSF's existing cash reserves, not the loan proceeds.
This restriction applies until the loan is repaid and the property transfers into the fund's direct ownership. Once the LRBA is discharged, the fund can undertake capital improvements using its own funds, provided those changes align with the sole purpose test and do not trigger related-party concerns.
Compliance and ATO Monitoring
SMSFs with borrowing arrangements face heightened data-matching and transaction-monitoring, and trustees must ensure rigorous record-keeping.
For the current financial year, the safe harbour interest rate for related-party LRBAs used to acquire real property is 8.95%. These rates apply to related-party LRBAs to ensure loan terms are on an arm's length basis. If your SMSF borrows from a related party at a rate below this threshold, the ATO may treat the difference as a non-arm's length arrangement, triggering non-arm's length income tax at the top marginal rate.
Interest Rates and Loan Structure
SMSF commercial property loans are available on both variable and fixed rate terms. Variable rates track underlying funding costs and allow flexibility for additional repayments or early exit without break costs. Fixed rates lock in certainty but carry penalties if the loan is repaid or refinanced before the fixed term expires. Most SMSF commercial loans are interest-only for a set period, typically five years, to preserve fund liquidity and maximise tax-deductible interest.
Interest on the loan is tax-deductible within the SMSF at 15% during accumulation phase, or zero in pension phase if the fund has moved into retirement mode. Rental income from commercial tenants is also taxed at these concessional rates, making the structure attractive compared to holding the same property outside super.
Why Location and Tenancy Matter in Perth
Commercial property performance in Perth varies sharply by precinct. Industrial and warehouse stock in areas like Malaga, Wangara, and Bibra Lake benefits from proximity to freight routes and Tonkin Highway access, supporting consistent tenant demand. Office and retail space in suburban nodes such as Joondalup or Cannington carries higher vacancy risk but can generate stronger yields when leased.
Funds targeting commercial property should prioritise locations with established tenant pools, infrastructure access, and zoning that supports flexible use. A multi-tenanted strata unit in a well-located industrial park offers lower single-tenant risk than a standalone premises reliant on one lease.
Application Process and Documentation
Applying for an SMSF loan requires the trust deed, SMSF financial statements, member statements, a contract of sale, and a completed bare trust deed. Lenders assess the fund's compliance history, borrowing capacity, and the property's income potential. Valuation is mandatory, and settlement typically requires coordination between the fund's accountant, solicitor, and mortgage broker to confirm the bare trust is correctly executed.
Call one of our team or book an appointment at a time that works for you to discuss your fund's structure, borrowing capacity, and the commercial property opportunities that align with your retirement strategy.
