What are the Portfolio Risks in SMSF Commercial Loans?

Concentration Risk When Business Premises Sit in Your Super

An SMSF commercial loan typically creates exposure to three related concentrations: the fund holds a single illiquid property, that property is often leased to the member's operating business, and the member's employment income also depends on that same business.

Consider a trustee who operates a manufacturing business in Adelaide's northern industrial corridor and acquires the business premises through the fund using an LRBA. The fund now relies on lease income paid by the operating company, the member's super balance depends on the commercial property value, and the member's personal income depends on business performance. If the business contracts, all three pillars weaken simultaneously. This overlapping exposure needs deliberate management before the loan settles, not after the fact.

Does the Business Real Property Definition Limit Your Options?

Business real property under section 66 of the SIS Act must be used wholly and exclusively in one or more businesses. This definition determines whether the property qualifies for the related party acquisition exception and whether it can be leased back to your operating entity without breaching in-house asset limits.

A warehouse fitted out for light manufacturing and located in a South Australian industrial precinct such as Wingfield or Lonsdale typically satisfies the definition without difficulty, provided no part of the premises is used for residential or private purposes. A property with a caretaker's residence or residential component may fail the wholly and exclusively test, or only partially qualify. Whether a property meets the definition depends on actual use at the time of acquisition and is a question of fact set out in SMSFR 2009/1. A property marketed as commercial does not automatically qualify.

SMSF Commercial Loan LVR and Liquidity Constraints

Limited recourse borrowing arrangements for commercial property typically operate at lower LVR than residential SMSF loans. Most lenders cap SMSF commercial loans at 70% LVR, with some offering 80% under specific credit circumstances.

Lower LVR means the fund requires a larger cash balance before settlement. That cash must come from member contributions, fund earnings, or the sale of existing assets. If the fund holds a concentrated equities portfolio, forced asset sales to raise the deposit can crystallise capital losses or trigger capital gains tax within the fund. The timing of the acquisition relative to contribution caps and fund liquidity should be modelled before loan preapproval, not at settlement.

Related Party Lease Structuring and Market Rent

When the fund leases business real property back to a related party such as the member's operating company, the lease must be on arm's length terms at market value. This requirement applies continuously, not just at lease commencement.

Market rent in South Australia's regional commercial precincts differs materially from metropolitan Adelaide rates. A lease rate set at metropolitan levels for a property in Regency Park or Dry Creek may not reflect local comparable transactions and could attract ATO scrutiny. The lease should be supported by a formal valuation or leasing agent assessment at commencement and reviewed periodically. A lease rate set below market value may be treated as providing a present-day benefit to the related party and contravene the sole purpose test under section 62 of the SIS Act.

Can You Improve the Property After Settlement?

Borrowed funds under an LRBA cannot be used to improve an existing asset. Drawdowns for capital improvements are not permitted for limited recourse borrowing arrangements entered into on or after 7 July 2010.

If the premises require fitout or refurbishment after acquisition, those costs must be funded from the fund's existing cash reserves or from future contributions. A manufacturing facility in Adelaide's north that needs cold storage installation or office partitioning after settlement requires separate capital planning. The LRBA funds the acquisition only. Improvement costs that exceed the fund's available liquidity may force a delay in the work or require additional member contributions, subject to contribution caps.

How Do You Balance Commercial Property Against Other SMSF Assets?

A single commercial property held under an LRBA can represent 60% to 80% of total fund assets, particularly in funds with balances below $1 million. That concentration leaves the fund exposed to a single asset class, a single tenant, and a single geographic location.

In a scenario where the fund holds $600,000 in total assets and borrows $420,000 at 70% LVR to acquire a $600,000 commercial property, the property represents the entire fund balance once settled. The fund holds no diversification across asset classes, no exposure to growth assets outside property, and no liquidity buffer for unexpected costs. If the tenant vacates or the local commercial market weakens, the fund has no alternate income source. Diversification within the fund should be considered before the loan is drawn, particularly where the member has more than ten years until retirement.

What Happens to Portfolio Balance if the Business Fails?

If the operating business leasing the premises fails, the fund loses its tenant and the member may lose their primary income source simultaneously. The fund must then find a replacement tenant in a market that may not suit the specific fitout or location.

South Australia's regional industrial precincts vary significantly in tenant demand. A purpose-built facility in Elizabeth or Salisbury may take longer to re-lease than a generic warehouse in Wingfield. The LRBA continues regardless of tenancy, so the fund must service loan repayments from reserves or other income while the property remains vacant. Modelling a vacancy period of six to twelve months before loan approval allows the fund to hold adequate reserves. A fund with no liquidity buffer and a single tenant faces forced asset sales or member loan arrangements if the tenant exits.

SMSF Commercial Rental Income Tax and Capital Gains

Rental income earned by the fund is taxed at 15% during accumulation phase or 0% if the fund has moved to pension phase. Capital gains on business real property held for more than twelve months receive a one-third discount during accumulation, reducing the effective CGT rate to 10%.

A commercial property held for fifteen years and sold during pension phase pays no capital gains tax. A property sold during accumulation phase after the same period pays 10% on the gain. The difference in tax treatment between accumulation and pension phase can exceed $100,000 on a property with significant capital appreciation. The timing of asset sales relative to the fund's phase should be planned in advance, particularly where the member intends to transition the fund to pension phase within five years of acquisition.

Do the New LRBA Rules Change Commercial Property Strategy?

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026, with new LRBA rules commencing on 10 August 2026. LRBAs for commercial property that satisfies the business real property definition under section 66 of the SIS Act are not affected by these changes.

Business real property remains exempt from both the in-house asset rules and the related party acquisition restrictions under the SIS Act. A related party lease structured on arm's length terms continues to be permissible. The legislative changes primarily affect residential property and certain other asset classes acquired under LRBAs, but do not alter the treatment of qualifying business real property. Trustees acquiring commercial premises should still seek advice from a licensed SMSF specialist to confirm the property satisfies the business real property definition before proceeding.

Single Asset LRBA Rules and Multiple Titles

Multiple real property titles cannot be acquired under a single LRBA unless the properties are distinctly identifiable as a single asset. Properties are considered a single asset if they are identifiable, have equal market value, and are bought and sold together.

Two adjoining industrial units on separate titles in the same South Australian industrial estate do not qualify as a single asset under this definition, even if they are substantially similar and leased to the same tenant. Each title requires a separate LRBA, which increases borrowing costs and creates additional trust structures. The single asset requirement should be confirmed during due diligence, particularly where the acquisition involves multiple titles or staged purchases.

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