SMSF Loans to Purchase an Office Building

The Structural Requirement That Protects Your Purchase

An SMSF commercial loan must be structured as a Limited Recourse Borrowing Arrangement with the office building held in a separate bare trust. The fund holds beneficial interest in the property during the loan term and acquires legal title once the debt is cleared. If default occurs, lender recourse is confined to the asset held in trust, with no claim against other fund assets. This structural requirement under sections 67A and 67B of the SIS Act remains unchanged following the residential property ban introduced in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

The 2026 amendments prohibit new limited recourse borrowing for residential property from approximately 10 August 2026, but explicitly preserve the ability to borrow for business real property. An office building leased to operating entities qualifies under this definition. The restriction targets housing stock, not commercial assets that generate income without displacing first home buyers from the market.

What Qualifies as Business Real Property

Business real property under section 66 of the SIS Act means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be operated by your fund. An office building leased to third-party tenants conducting their businesses satisfies this definition. A building leased to a related party also qualifies, provided the lease is on arm's length terms at market value and the tenant uses the premises for genuine business purposes.

Consider a fund purchasing a three-level office building in Stafford, leased to a combination of medical practitioners, accountants, and IT consultants. The property is used wholly for business purposes by the tenants. It meets the definition even though the fund itself is not conducting a business on the premises. If one level contained a residential apartment for private use, the property could still qualify if the apartment occupied no more than 2 hectares and the main use of the whole property remained business, not domestic. In practice, most office buildings contain no residential component and present no classification ambiguity.

The Deposit and Borrowing Capacity Constraint

Lenders typically require a 30 to 40 percent deposit for SMSF commercial loans, with maximum loan-to-value ratios between 60 and 70 percent. This deposit must come from existing fund assets. Contributions can be used to build the required deposit over time, subject to annual caps. The concessional contributions cap is $32,500 per annum from 1 July 2026, with a non-concessional cap of $130,000 per annum. The bring-forward arrangement allows up to $390,000 in non-concessional contributions over three years where your total superannuation balance was below $1.84 million on 30 June of the prior year.

Borrowing capacity depends on the rental income the office building generates, not your personal income. Lenders assess whether net rental income after outgoings can service the loan at current variable rates. Vacancy periods reduce serviceability. An office building with multiple tenants on staggered lease expiry dates presents lower vacancy risk than a single-tenant building. If the building sits vacant for six months while you search for a tenant, the loan still requires servicing from other fund income or contributions. Lenders apply different serviceability buffers to commercial property lending compared to residential, reflecting the different risk profile and lease structures involved.

How Division 296 Tax Affects Large Balances

Where a member's total superannuation balance exceeds $3 million at the end of the financial year, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to earnings above that higher threshold. Outstanding loan amounts under an LRBA entered into on or after 1 July 2018 are included in your total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where you have satisfied a condition of release with a nil cashing restriction.

In a scenario where your balance sits at $2.8 million and you borrow $600,000 to purchase an office building under an LRBA with a related party lender, the outstanding loan amount is added to your total superannuation balance. Your balance for Division 296 purposes becomes $3.4 million. Earnings attributable to the $400,000 above the threshold are taxed at an additional 15 percent. The calculation uses a proportionate method applied to the increase in your balance over the year, adjusted for contributions and withdrawals. If the LRBA is with an unrelated commercial lender and you have not met a condition of release, the outstanding loan is not included in your balance.

The Single Asset and Improvement Restriction

Borrowed funds must be used to acquire a single asset. An office building on one title qualifies. Two adjoining office buildings on separate titles do not, even if you intend to operate them as a single complex. The exception applies where multiple assets are distinctly identifiable as a single asset, meaning they are identical, have equal market value, and are bought and sold together. Real property on separate titles does not meet this test.

You cannot use borrowed funds to improve an existing asset. If your fund already owns an office building outright, you cannot establish an LRBA to fund a refurbishment or extension. Borrowed funds also cannot be used to repair or improve a property acquired under an LRBA. For arrangements entered into on or after 7 July 2010, drawdowns for capital improvements are prohibited. Routine maintenance and repairs must be funded from rental income or other fund assets. If the building requires significant capital works after purchase, your fund needs sufficient liquid assets to cover those costs without further borrowing.

Leasing to Your Own Business

Business real property leased between the fund and a related party is excluded from the in-house asset rules, which ordinarily limit related party transactions. Your SMSF can purchase an office building and lease it to a company you control, provided the lease is on arm's length terms at market value. Rent must reflect what an unrelated tenant would pay for comparable premises in the same location. The company must use the premises for genuine business purposes. Personal or domestic use disqualifies the property.

A member operating a dental practice through a corporate structure could establish an SMSF loan to purchase premises in Stafford, then lease the building to the operating company. The rent paid by the company becomes assessable income in the fund, taxed at 15 percent during accumulation phase or zero percent if the fund has commenced a pension. The operating company claims the rent as a deductible business expense. The arrangement must be documented with a formal lease agreement at market terms. If the ATO determines the rent is not at arm's length, income from the arrangement may be assessed as non-arm's length income and taxed at the highest marginal rate under section 295-550 of the Income Tax Assessment Act 1997.

Refinancing an Existing Commercial LRBA

Refinancing a commercial property loan held under an LRBA is permitted, provided the refinanced loan relates to the same asset, maintains the limited recourse character of the original arrangement, and meets arm's length terms. A significant change to the terms or conditions of an LRBA may cause the ATO to treat the arrangement as ending and a new arrangement beginning. Circumstances that may trigger this treatment include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement.

Practical Compliance Guideline PCG 2016/5 sets out safe harbour interest rates for SMSF LRBAs, updated annually by the ATO. A refinancing that moves from a variable rate to a fixed rate within the safe harbour range should not cause the arrangement to be treated as a new LRBA. A refinancing that significantly increases the loan amount or extends the term beyond what is consistent with the original arrangement may attract ATO scrutiny. Where the refinancing occurs to access a lower rate or consolidate with a different lender without changing the fundamental terms, the arrangement continues. Legal and SMSF specialist advice is required before proceeding with any refinancing to confirm the arrangement will not be treated as a new LRBA subject to post-commencement rules.

Rental Income and Capital Gains Treatment

Rental income from an office building held in an SMSF is taxed at 15 percent during accumulation phase. If the fund has commenced a pension, rental income is tax-free. Outgoings including loan interest, rates, insurance, repairs, and property management fees are deductible against rental income. Depreciation on the building and fixtures can also be claimed, subject to the capital works and diminishing value rules under the income tax legislation.

Capital gains on the sale of the office building are taxed at 15 percent during accumulation phase, with a one-third discount available if the asset was held for at least 12 months, resulting in an effective rate of 10 percent. If the fund has commenced a pension and the asset was supporting that pension, the capital gain is tax-free. The sole purpose test under section 62 of the SIS Act requires that the fund is maintained solely to provide retirement benefits to members or their dependants. An office building held under an LRBA must be acquired and held for this purpose, not for current personal use or enjoyment by members.

Call one of our team or book an appointment at a time that works for you to discuss whether an SMSF loan for an office building aligns with your retirement strategy and how the structure should be established to meet compliance requirements.

Frequently Asked Questions