SMSF Loans & Mixed-Use Property: What You Need to Know

Can You Still Borrow Through Your SMSF to Buy a Mixed-Use Property?

You can borrow through your SMSF to purchase a mixed-use property, but only if that property qualifies as business real property when the loan is entered into and throughout the entire life of the loan. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 changed the meaning of acquirable asset in the Limited Recourse Borrowing Arrangement provisions, and for any LRBA entered into on or after 10 August 2026 to purchase real property, the property can only be business real property. A mixed-use property that combines commercial premises on the ground floor with a residential unit above does not automatically meet this threshold simply because part of it generates business income.

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The residential component of a mixed-use property typically fails this test because it is used for domestic purposes. Consider a scenario in Kedron where an SMSF trustee identifies a two-storey property with a retail tenancy on the ground floor and a residential apartment above. The residential apartment is leased to a tenant under a standard residential tenancy agreement. The property does not meet the wholly and exclusively requirement, and if the asset does not meet the requirement, the SMSF has breached the law against borrowing and compliance action may apply. The SMSF can still acquire the property without borrowing if it has sufficient cash, but it cannot finance the purchase under an LRBA.

The outcome would differ if the same property had both levels leased under commercial arrangements to a business tenant. In that scenario the property could potentially qualify as business real property, provided the residential component is not used for private or domestic purposes and the entire property is used wholly and exclusively in business operations. The distinction turns on use, not zoning or description.

What Changed on 10 August 2026 and What Was Protected

An LRBA entered into before 10 August 2026 to finance a real property acquisition is not affected by the new rule, including where the SMSF maintains or refinances it on or after 10 August 2026. If you exchanged a binding contract to purchase a mixed-use property before that date, even if settlement occurs later, the old rules apply and the property does not need to meet the business real property definition. The new rule does not apply where an SMSF exchanged a binding contract to acquire real property before 10 August 2026, even if the contract settles or the LRBA is entered into on or after 10 August 2026.

In general, later variations of the contract do not change this position. However, if a contract is changed significantly and its fundamental terms no longer exist, the ATO states it may be considered that a new arrangement has begun. If you renegotiate price or extend the settlement date by a few months, the transitional protection remains. If you substitute a different property or rewrite the contract to fundamentally alter what is being acquired, you may lose that protection and be subject to the new rules.

How the Wholly and Exclusively Test Works in Practice

The wholly and exclusively requirement is strict. A commercial description does not by itself mean a property is business real property. A building zoned for mixed-use or listed as commercial in council records still fails the test if part of it is used for residential purposes. The ATO applies this test at the point the LRBA is entered into and continuously throughout the loan term.

Consider a property on Gympie Road in Kedron with a ground-floor medical suite and a two-bedroom apartment on the upper level. The medical suite is leased to a GP practice. The apartment is leased to a tenant on a standard residential lease. The property generates income from both uses, but residential real property that meets that definition can be acquired and financed under an LRBA, but it must be business real property when the LRBA is entered into and throughout the life of the LRBA. The residential tenancy disqualifies the property. If the apartment lease later converts to a commercial arrangement, for example leased to the GP practice for use as consulting rooms or staff accommodation under a commercial lease, and the domestic use ceases entirely, the property could then qualify, but only for a new LRBA entered into after that conversion. An existing LRBA over a non-qualifying property cannot be retrospectively validated.

Real property used in a primary production business and containing a dwelling for private or domestic purposes can still meet the wholly and exclusively requirement if the dwelling is in an area of land of no more than 2 hectares and the main use of the whole property is not domestic or private. This carve-out applies to rural properties, not to suburban mixed-use buildings where the residential component is separately tenanted.

What Happens If the Property Stops Qualifying During the Loan

If a real property asset stops being business real property during the LRBA, the SMSF fails to maintain the LRBA under the rules and compliance action may apply. A property that qualifies at the outset can lose that status if its use changes. If the commercial tenant in your Kedron mixed-use property vacates and you lease the ground floor to a residential tenant, the property no longer meets the wholly and exclusively test and the LRBA is no longer compliant.

For land on which commercial premises are leased, the property does not stop being business real property only because the owner is looking for a new tenant, but it does if the owner abandons plans to lease it. A temporary vacancy between commercial tenants does not trigger a breach, provided you are actively marketing the space for commercial lease and intend to maintain the property's business use. Switching the use to residential or leaving the property vacant indefinitely without a commercial leasing strategy would breach the requirement.

The distinction between temporary vacancy and change of use determines compliance. Document your leasing intentions, keep marketing records, and ensure any new lease maintains the business real property character.

Refinancing an Existing LRBA Over a Mixed-Use Property

The ATO considers refinancing an LRBA to mean entering into a new loan contract for the same asset, with the same or a new lender. The new rule does not apply where an SMSF maintains or refinances, on or after 10 August 2026, an LRBA entered into before that date. If you entered into an LRBA before 10 August 2026 over a mixed-use property that does not meet the business real property definition, you can refinance that loan without triggering the new rules, provided the refinancing does not constitute a new arrangement.

Under the general LRBA rules, a significant change to the terms or conditions of an LRBA ends the arrangement and starts a new one. Changes that result in a new arrangement include refinancing the original borrowing, a borrowing inconsistent with the earlier arrangement such as borrowing to acquire an asset or class of asset not contemplated under the original arrangement, and a change to the ultimate beneficiaries of the arrangement. Varying the contract of borrowing does not always create a refinancing; this depends on the nature and extent of the variation and the intention of the parties.

If you switch lenders, negotiate a lower rate, or adjust the loan term without changing the fundamental structure, that is typically treated as a refinance of the existing LRBA and remains protected. If you draw additional funds to acquire a second property, or if you restructure the holding trust or change the beneficial ownership, you may trigger a new arrangement subject to the current rules.

A refinance must meet the law that applied when the refinancing took place. If the refinance is treated as a new LRBA entered into on or after 10 August 2026, the property must meet the business real property definition at that point.

Commercial Loan Structures and Bare Trust Requirements

Under an LRBA the SMSF trustee obtains a loan to purchase an acquirable asset held in a separate holding trust. The SMSF acquires a beneficial interest in the asset and the right to legal ownership after the loan is repaid, and the lender's recourse is limited to rights relating to the asset. The holding trust is commonly referred to as a bare trust, though that term does not appear in the legislation. The trust must hold the asset for the benefit of the SMSF, and the holding trust cannot be a discretionary trust or a unit trust in which the SMSF trustee is one of a number of unit holders.

For a commercial property that qualifies as business real property, the structure operates the same way as any other LRBA. The SMSF borrows to acquire the property, the property is held in the bare trust, and the SMSF makes loan repayments from fund income or member contributions. A related party of the SMSF may give the lender personal support for the loan, but their recourse must be limited to the asset under the arrangement and not other SMSF assets. A member guarantee is permitted, but the lender cannot pursue other SMSF assets if the loan defaults.

A related party lender must charge no more than an arm's length rate of interest, and PCG 2016/5 sets out arm's length terms for LRBAs established by SMSFs. NALI is taxed at the highest marginal tax rate of 45 per cent. If the interest rate is below market, the discount is treated as non-arm's length income and the fund's assessable income from that asset is taxed at 45 per cent rather than the concessional 15 per cent rate.

Tax Treatment of Rental Income and Capital Gains

A complying SMSF is taxed at a concessional rate of 15 per cent on its assessable income, which includes net capital gains unless the asset is a segregated current pension asset. Rental income from a commercial property held in accumulation phase is taxed at 15 per cent. A complying SMSF is entitled to a CGT discount of one-third if the asset was owned for at least 12 months, which produces an effective rate of 10 per cent on the discounted gain. The one-third discount applies to the gross capital gain, reducing the effective rate on the discounted portion to 10 per cent when combined with the 15 per cent tax rate.

Capital losses are not deductible against other income and can only be offset against capital gains, with excess losses carried forward. If the property is sold at a loss, that loss can offset future capital gains but does not reduce the fund's tax on rental income or other assessable income.

An SMSF can receive a tax exemption on investment income from assets that support a retirement phase income stream, called ECPI. A capital gain is not automatically exempt because a fund has started a pension. The exemption depends on whether the asset is a segregated current pension asset or whether the proportionate method applies. From the 2022 financial year, where all of a fund's assets are paying retirement phase benefits at all times of the year, the segregated method must be used for the whole year and an actuarial certificate is not required. If the fund has both accumulation and pension interests, the proportionate method applies and an actuary determines the exempt proportion.

Deposit Requirements and Borrowing Capacity for SMSF Commercial Loans

Lenders treat SMSF commercial loans differently from standard residential lending. Most SMSF lenders require a minimum deposit of 30 per cent, meaning the maximum loan-to-value ratio is 70 per cent. Some lenders will lend up to 80 per cent LVR for residential property under the old rules, but those loan products are no longer available for new LRBAs over residential or mixed-use property that does not meet the business real property definition.

Borrowing capacity is assessed on the fund's ability to service the loan from existing balance, contributions, and rental income. Lenders do not assess personal income of members when determining SMSF borrowing capacity, though they may require personal guarantees. The rental income must be sufficient to service the loan, and where the property requires fit-out or has vacancy risk, lenders may apply a discount to projected rental income.

Interest rates on SMSF commercial loans are typically higher than standard residential loans, reflecting the additional complexity and risk. At current variable rates, SMSF commercial loans are priced above standard owner-occupied and investment loan rates. Fixed-rate options are available, though the range of lenders offering SMSF fixed-rate products is narrower than the residential market.

Comparing SMSF Lenders and Structuring the Application

Not all lenders offer SMSF loan products, and those that do apply different criteria for deposit size, loan term, interest rate, and acceptable property types. Comparing SMSF lenders requires understanding not just the interest rate but the total cost structure, including establishment fees, ongoing fees, valuation costs, and legal costs for the bare trust deed.

An SMSF mortgage broker with experience in commercial and self-managed super lending can identify lenders who will accept the property type you are acquiring and structure the application to meet both the lender's credit policy and the regulatory requirements under the SIS Act. The loan application must demonstrate that the acquisition meets the sole purpose test, that the property will be used to provide retirement benefits, and that the borrowing structure complies with the limited recourse requirements.

Where the property is leased to a related party of the SMSF, when property held by the holding trust is leased to a related party of the SMSF, the SMSF's interest in the holding trust is an in-house asset, unless the leased asset would not be an in-house asset if the SMSF owned it directly, such as business real property. Business real property leased to a related party is exempt from the in-house asset rules, but only if it meets the business real property definition. A mixed-use property that fails that test and is leased to a related party would breach the in-house asset limits, which cap such assets at 5 per cent of the fund's total assets.

Call one of our team or book an appointment at a time that works for you. We'll assess whether your property qualifies under the current rules, compare lenders who can support the structure, and walk you through the compliance requirements before you commit to a contract.

Frequently Asked Questions