Australian SMSF Property Buyers Shift to Commercial as Residential Borrowing Closes

Commercial properties can often yield a high cash flow.

Australia’s SMSF borrowing rules have narrowed the property options for trustees: since August 10, funds can’t enter new limited recourse borrowing arrangements (LRBAs) to buy residential property. Existing arrangements made before that date are grandfathered and can still be refinanced. Borrowing remains available for commercial property, while residential purchases can proceed only if the fund pays in full.

That change puts commercial assets at the centre of the SMSF property discussion. The appeal lies in a combination of rental income, tax treatment and lending terms, though higher costs and more complex ownership structures mean the shift won’t suit every fund.

Warehouses can be popular in certain locations.

Commercial property keeps SMSF tax settings

Steve Palise, owner and director of Palise Property, says the tax advantages available to SMSFs remain in place when funds borrow to acquire commercial property. During the accumulation phase, net rental income and capital gains are taxed at a maximum rate of 15 per cent. For an asset held at least 12 months, the effective CGT rate on sale is 10 per cent in that phase; sales during the pension phase incur no CGT, according to the source.

Those settings help explain why commercial property retains a place in retirement portfolios, but the numbers sit alongside the asset’s operating risks and the fund’s borrowing costs. The tax treatment alone doesn’t determine whether a purchase works.

Director of Palise Property Steve Palise.

Separate assessment and longer loan terms

Andrew Tan, a mortgage broker at Rethink Finance, says lenders assess SMSFs as stand-alone borrowers. That can give trustees who have reached their personal borrowing capacity a separate path to finance, with current and, in some cases, proposed fund contributions considered in serviceability assessments.

Commercial SMSF lending can also allow a smaller deposit than borrowing outside super. Tan says some lenders will advance up to 80 per cent of a property’s value, compared with 65 to 70 per cent for standard commercial lending. Loan structure is another point of difference: commercial loans outside super are often rolling facilities reviewed every two to five years, while SMSF commercial loans can run for 30 years.

“It is evaluated on a stand-alone basis,” Tan says. “You get like a blank slate again in terms of lending.” He describes the longer term as a “set and forget” feature of SMSF borrowing.

Rethink Finance mortgage broker Andrew Tan.

The financing advantages come at a price. SMSF loans are generally provided by non-bank lenders, and Tan says commercial rates can be up to two percentage points higher. Setting up and administering the fund also costs more than a conventional purchase.

Structure matters. Tan warns that errors in establishing an SMSF for property ownership can lead to costly corrections. The source notes that non-complying funds are taxed at the highest marginal rate of 45 per cent, making specialist advice an important part of the transaction’s cost base.

Lending through a SMSF has different benefits and drawbacks to regular commercial lending. Picture: Derby Property Group

Commercial demand and income potential

Palise says his agency buys an average of 30 commercial properties for clients each month, with about 40 per cent purchased through SMSFs. He sees demand extending beyond super funds, as buyers look to commercial assets for passive income.

Palise says commercial properties can generate three times the income of residential assets while using a similar 80 per cent loan-to-value ratio. In his view, that can translate into higher retirement income for the same outlay. He says he was recommending commercial property before the borrowing rules changed.

Higher potential income comes with a different leasing profile. Palise cautions that asset selection is more involved and that a property’s suitability for tenants matters: a long vacancy can erode the income case quickly.

Shopfronts on busy streets can often attract tenants. Picture: Ray White Commercial Western Sydney

Residential remains possible with cash

Trustees can still buy residential property through an SMSF using the fund’s existing cash, but paying outright removes the borrowing that can expand purchasing power. It also requires a substantial super balance.

Multiple SMSFs can potentially pool funds to acquire a property through a Unit Trust, allowing each fund to hold a share. Tan says this approach can be costly and complex to establish, so it doesn’t remove the structural work involved.

The practical change is a sharper divide in SMSF property strategies: residential exposure now requires capital on hand, while commercial borrowing remains available with distinct income potential and lending terms. For trustees, the deciding factors are likely to be fund capacity, financing costs and the property’s ability to retain tenants.