Industrial property purchased through a Limited Recourse Borrowing Arrangement requires a separate bare trust structure, higher deposit capacity, and compliance with the sole purpose test from the outset.
Why industrial property sits in the commercial SMSF loan category
Industrial assets, including warehouses, factories, and light manufacturing facilities, are classified as commercial property for lending purposes. Non-bank and specialist lenders now offer LVRs up to 80% for commercial property held in an SMSF, though most trustees should expect to provide at least a 30% to 40% deposit when acquiring industrial sites. The loan must be structured as a Limited Recourse Borrowing Arrangement, with the property held in a bare trust until the loan is repaid. The key distinction between industrial and residential SMSF loans is that commercial property carries different valuation requirements, lease structures, and ongoing compliance obligations.
Deposit requirements and borrowing capacity for industrial sites
Most lenders offering SMSF commercial loans will lend between 60% and 70% LVR on industrial property, though some non-bank lenders extend to 80% in specific scenarios. The deposit must come from existing fund assets, which means the SMSF needs sufficient liquidity before pursuing an industrial acquisition. Borrowing capacity is determined by the rental income the property generates, not the fund's total asset value. Lenders typically require rental income to cover at least 120% to 150% of loan repayments, depending on lease quality and tenant strength. In our experience, funds with diversified portfolios and strong cash flow are approved more readily than those relying on a single contribution source.
Consider a Queensland-based SMSF purchasing a light industrial unit in Yatala, leased to a logistics company on a five-year term. The property is valued at $850,000, and the fund has $350,000 in cash from consolidated rollovers. The lender approves a 60% LVR loan of $510,000 at a variable rate, with annual rental income of $68,000. Loan repayments are approximately $48,000 per year, giving a servicability ratio of 141%. The trustee uses the remaining $340,000 to cover the deposit, stamp duty, and establishment costs. The property is held in a bare trust with the SMSF as beneficiary, and all rental income flows directly to the fund.
Compliance requirements specific to industrial property LRBAs
The property must satisfy the sole purpose test, meaning it exists solely to provide retirement benefits to fund members. You cannot lease industrial property to a related party unless the value of that lease, combined with other in-house assets, remains below 5% of the fund's total assets. Most trustees leasing to unrelated third parties avoid this restriction entirely. Structural improvements that alter the character of the property, such as adding mezzanine floors or reconfiguring warehouse layouts, are not permitted while the loan is active. Repairs and maintenance are allowed, but capital works that change the fundamental use or structure require the loan to be discharged first.
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Trustees must also complete certified training covering LRBAs, related-party transactions, and compliance obligations. Non-compliance may result in penalties of up to $19,800 or fund disqualification. The training requirement applies to both new and existing trustees, and documentation must be retained as part of the fund's record-keeping obligations.
Interest rates and loan terms for commercial SMSF borrowing
Variable rates on commercial SMSF loans typically sit above residential SMSF loan rates due to the lender's higher perceived risk. Fixed rates are available but less common, and most lenders offering fixed terms cap the fixed period at three to five years. For the current financial year, the safe harbour interest rate for related-party LRBAs used to acquire real property is 8.95%, down from 9.35% the previous year. This rate applies only to loans between related parties and ensures the arrangement is on an arm's length basis. Most commercial SMSF loans through external lenders sit within a range that reflects prevailing market conditions, and you should compare offers across multiple non-bank and specialist lenders before committing.
Loan terms for SMSF property loans on industrial assets typically range from 15 to 30 years, though some lenders cap terms at 20 years depending on the borrower's age and the fund's liquidity profile. Shorter terms reduce total interest paid but increase annual repayment obligations, which can strain cash flow if the property experiences vacancy or lease renewal delays.
Bare trust structure and what it means for industrial holdings
Each industrial property acquired under an LRBA must be held in a separate bare trust, with the SMSF named as beneficiary. If the fund acquires two industrial units, two separate trusts and two separate loan arrangements are required. The bare trust exists solely to hold legal title until the loan is repaid, at which point the property transfers to the SMSF directly. The trustee of the bare trust is typically a corporate trustee or the same individual trustees managing the SMSF, but the trust deed must clearly define the beneficiary arrangement and the trustee's limited role.
The separation of legal and beneficial ownership is what makes the loan limited recourse. If the SMSF defaults, the lender's claim is restricted to the property held in the bare trust and cannot extend to other fund assets. This structure protects the broader SMSF portfolio but also limits the lender's security, which is why deposit requirements and servicability ratios are higher than traditional commercial loans.
Rental income, tax treatment, and cash flow planning
Rental income from industrial property held in an SMSF is taxed at a maximum rate of 15% during the accumulation phase, or zero if the fund is in pension phase. Capital gains on the sale of industrial property are taxed at 10% if the asset has been held for more than 12 months and the fund is in accumulation, or exempt if in pension phase. This tax treatment is one of the primary reasons trustees pursue commercial property through their super fund rather than holding it personally or in a company structure.
Cash flow planning is critical when the property is subject to an LRBA. The fund must generate sufficient income to meet loan repayments, cover rates and insurance, and maintain a buffer for vacancies or maintenance costs. Industrial properties with long-term leases to creditworthy tenants provide more predictable cash flow than those with short-term or high-turnover tenancies. Funds that rely on member contributions to service the loan may face compliance issues if contributions exceed the annual cap or if the fund's cash flow becomes dependent on ongoing member support rather than rental income.
When refinancing or restructuring an existing SMSF loan makes sense
If the SMSF holds an industrial property with a loan established several years ago, the original LVR and interest rate may no longer reflect current market conditions. Refinancing to access a lower rate or consolidate terms can reduce repayment obligations and improve cash flow. Some lenders also allow trustees to refinance and release equity for further acquisitions, though this requires the SMSF to meet servicability criteria for the increased borrowing.
SMSF loan refinancing is also relevant when the fund's structure has changed, such as moving from individual to corporate trustees, or when the original lender no longer offers competitive terms. The refinance process requires a new valuation, updated financials, and compliance checks to ensure the fund remains within borrowing limits and meets the sole purpose test. Trustees should review loan terms every two to three years to confirm the arrangement still aligns with the fund's retirement strategy and cash flow capacity.
Call one of our team or book an appointment at a time that works for you to discuss how an industrial property LRBA fits within your fund's structure and whether current lending conditions support your acquisition or refinance goals.
Frequently Asked Questions
Can I lease industrial property in my SMSF to my own business?
You can lease industrial property to a related party only if the value of that lease, combined with other in-house assets, remains below 5% of the fund's total assets. Most trustees lease to unrelated third parties to avoid this restriction entirely.
What deposit do I need to buy industrial property through my SMSF?
Most lenders require a deposit of 30% to 40% for industrial property, though some non-bank lenders offer LVRs up to 80%. The deposit must come from existing fund assets, and the fund needs sufficient liquidity before pursuing an acquisition.
Can I make structural improvements to industrial property held under an LRBA?
Structural improvements that change the fundamental character of the property, such as adding mezzanine floors or reconfiguring layouts, are not permitted while the loan is active. Repairs and maintenance are allowed, but capital works require the loan to be discharged first.
How is rental income from SMSF industrial property taxed?
Rental income is taxed at a maximum rate of 15% during the accumulation phase, or zero if the fund is in pension phase. Capital gains are taxed at 10% if the asset has been held for more than 12 months in accumulation, or exempt in pension phase.
Do I need a separate loan for each industrial property in my SMSF?
Yes, each industrial property acquired under an LRBA must be held in a separate bare trust with a separate loan arrangement. If the fund acquires two properties, two separate trusts and two separate loans are required.
