Proven Tips to Buy Retail Property Through Your SMSF

Can You Still Borrow Through Your SMSF to Buy Retail Property?

Yes, you can still borrow through your self-managed super fund to purchase retail property using a limited recourse borrowing arrangement. Recent legislative changes that commenced in August this year now prevent new borrowing arrangements for residential investment property through SMSFs, but retail premises that satisfy the business real property definition remain available for LRBA purchases. This distinction creates a genuine opportunity for women looking to build wealth through commercial property while accessing the tax advantages of superannuation.

The difference comes down to how the property is actually used. Retail property such as a shopfront leased to a cafe, boutique, or medical practice can qualify as business real property under the Superannuation Industry (Supervision) Act, provided it is used wholly and exclusively in a business. The business does not need to be one you operate yourself. A tenant running their own retail business in the premises satisfies the requirement.

How Limited Recourse Borrowing Arrangements Work for Retail Property

Under an LRBA, the retail property is held in a separate bare trust while your SMSF makes loan repayments. Your fund holds the beneficial interest in the property and receives the rental income, but legal ownership transfers only once the loan is fully repaid. If something goes wrong and the loan defaults, the lender's recourse is limited to the property held in the trust. No other assets in your SMSF are at risk.

Consider a scenario where your SMSF borrows to acquire a small retail unit leased to a physiotherapy clinic. The property is valued and purchased through the holding trust. Your fund pays the loan from a combination of rental income, any concessional contributions you continue to make, and existing fund earnings. Once the debt is cleared, the trustee of the bare trust transfers legal title to your SMSF trustees. During the life of the loan, rental income flows to your fund and is taxed at 15 percent in accumulation phase, or potentially exempt if the property supports a retirement-phase pension.

What Qualifies as Business Real Property

Business real property means land and buildings used wholly and exclusively in one or more businesses. Whether a property satisfies this definition is determined by its actual use at the time of acquisition, not by how it is zoned or marketed. A shopfront described as commercial on the listing does not automatically qualify. You need to assess how the tenant uses the premises.

A retail unit leased to a florist, hairdresser, or accountant would typically qualify. A property with a residential component, such as a shop with an upstairs apartment, may not qualify unless the residential portion is genuinely incidental. The ATO's guidance makes clear that mixed-use properties require careful assessment. If you are considering a retail property with any residential element, seek advice from an SMSF specialist before proceeding. The wholly and exclusively test is strict, and a property that fails the definition cannot be acquired from a related party and may be treated as an in-house asset if leased to one.

SMSF Loan Deposit and Borrowing Capacity

Most lenders offering SMSF loans for commercial property require a minimum deposit of 30 to 35 percent, meaning the maximum loan-to-value ratio is typically 65 to 70 percent. Some lenders may consider lower deposits in specific circumstances, but SMSF lending is a specialist area and the range of lenders is narrower than for standard investment loans.

Your fund's borrowing capacity depends on the rental income the property can generate, the fund's existing balance, and your capacity to make ongoing contributions to service the loan. Lenders assess whether the rent, combined with any additional contributions or fund earnings, can meet the loan repayments. Because superannuation is a long-term investment vehicle, lenders may be more willing to consider serviceability over a longer horizon, but they still require evidence that the loan can be repaid without breaching contribution caps or liquidity rules.

In our experience, funds with balances below $200,000 often struggle to meet both deposit and serviceability requirements for retail property purchases unless members have capacity to make substantial concessional or non-concessional contributions. Contribution caps from 1 July this year are $32,500 for concessional contributions and $130,000 for non-concessional contributions annually, with a bring-forward arrangement allowing up to $390,000 over three years if your total superannuation balance was below $1.84 million on 30 June of the previous year.

Tax Treatment of Rental Income and Capital Gains

Rental income received by your SMSF from a retail property is taxed at 15 percent during accumulation phase. Deductions are available for expenses such as interest on the LRBA loan, property management fees, council rates, insurance, and repairs. Capital works deductions may also apply depending on the age and construction of the building.

When the property is eventually sold, any capital gain is included in your fund's assessable income. If the property has been held for at least 12 months, a one-third discount applies to the capital gain, which can result in a maximum effective tax rate of 10 percent on the discounted portion. The actual tax liability depends on the property's cost base, selling costs, any capital improvements, and whether your fund has capital losses to offset.

If your fund has moved into pension phase and the property supports a retirement-phase income stream, the capital gain may be partly or fully exempt depending on whether the fund's assets are segregated or proportionate. Funds with both accumulation and pension interests need to apply the exempt current pension income rules, which can be complex. An actuarial certificate is usually required where a fund uses the proportionate method.

Leasing Retail Property to a Related Party

You can lease retail property owned by your SMSF to a business you operate or control, provided the lease is on arm's length terms at market value. Business real property leased to a related party is excluded from the in-house asset rules, which means it does not count toward the 5 percent in-house asset limit that applies to other related party transactions.

As an example, if you own a bookkeeping practice through a company or trust structure, your SMSF could purchase a retail suite and lease it back to that entity. The lease must reflect market rent for comparable premises in the area, and the terms must be documented in a formal lease agreement. If the rent is set below market value, the ATO may treat the shortfall as non-arm's length income and tax it at 45 percent. Related party leases attract scrutiny, so engaging a qualified valuer to determine market rent and reviewing the lease annually is a sensible step.

Division 296 Tax and Large Superannuation Balances

From 1 July this year, members with total superannuation balances exceeding $3 million are subject to an additional 15 percent tax on earnings attributable to the amount above that threshold. Members with balances above $10 million face a further 10 percent tax on earnings above that higher threshold. This Division 296 tax applies to adjusted fund earnings, which include rental income and realised capital gains.

An unrealised increase in the value of your retail property does not by itself trigger Division 296 tax. The gain must be realised through a sale or other CGT event. For members approaching or exceeding the $3 million threshold, the timing of a property sale and the resulting capital gain can have a material impact on tax payable. SMSF trustees had the option to make a one-time election to revalue all CGT assets to market value as at 30 June last year for Division 296 purposes. This election recognised accrued value before the new tax commenced and applies only for calculating Division 296 fund earnings, not for general income tax purposes. If your balance is near the threshold and you hold investment property in your fund, discussing the interaction of Division 296 tax with your adviser is worthwhile.

Refinancing an Existing SMSF Loan for Retail Property

You can refinance an existing SMSF loan for retail property to access a lower interest rate or different loan features, provided the refinanced loan relates to the same property and maintains the limited recourse character of the original arrangement. The ATO's position is that a significant change to the terms or conditions of an LRBA ends the arrangement and creates a new one. Refinancing that is consistent with the original arrangement and does not alter the ultimate beneficiaries or the asset acquired is generally acceptable.

Interest rates for SMSF loans are typically higher than standard investment loan rates, reflecting the additional legal structure and lender risk. The ATO publishes safe harbour interest rates each year under Practical Compliance Guideline PCG 2016/5. Loans that meet the safe harbour rate are considered to satisfy the arm's length requirement. Loans with interest rates below the safe harbour may be challenged, and income from those arrangements may be taxed as non-arm's length income at 45 percent. Refinancing to a rate that remains within the safe harbour range protects your fund from that risk.

Working with an SMSF Specialist Mortgage Broker

SMSF lending is a specialist area. Not all lenders offer LRBA loans, and those that do have differing policies on property types, loan-to-value ratios, and serviceability assessment. Some lenders will only consider retail property in metro areas or with established tenants on long leases. Others may consider regional retail or properties with shorter lease terms, but at higher interest rates or lower LVRs.

An SMSF mortgage broker who works regularly with LRBA transactions can identify lenders suited to your fund's circumstances and the specific property you are considering. They can also help structure the application to reflect the fund's serviceability accurately, taking into account rental income, contribution capacity, and the fund's existing investments. LRBA applications require documentation that differs from a standard investment loan, including the trust deed, SMSF deed, financial statements, and evidence of the trustees' authority to borrow. Working with someone who understands the requirements can reduce delays and avoid issues that might otherwise prevent settlement.

Call one of our team or book an appointment at a time that works for you. We work with women across Australia to structure SMSF borrowing arrangements that align with your retirement goals and comply with the current legislative framework.

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