Unlock the secrets to SMSF Industrial Property Loans

Using Your SMSF to Purchase Industrial Property After the 2026 Changes

Industrial property remains available for SMSF purchase using borrowed funds after August 2026. The new restriction affects residential property only, not business real property that meets the definition under section 66 of the SIS Act. Industrial facilities, warehouses, and commercial premises used wholly and exclusively in a business continue to qualify for Limited Recourse Borrowing Arrangements.

Consider a Squadron Leader at RAAF Base Laverton with $450,000 in their SMSF looking at an industrial unit in Sunshine West. The property is leased to a food manufacturer on a five-year term. Because the facility is used exclusively in the tenant's business operations, it qualifies as business real property. The fund can borrow up to 70 percent of the property value, requiring a deposit of around $130,000 to $150,000 depending on the lender's assessment. The rental income flows to the SMSF, taxed at 15 percent during accumulation phase. Once the loan settles, the property is held in a bare trust until the debt is repaid, at which point legal title transfers to the SMSF.

Defence members frequently have access to a SMSF loan structure that suits shift work and deployment cycles. Industrial tenants typically sign longer lease terms than residential tenants, often three to five years with options to renew. Rent reviews are built into most commercial leases, either as fixed annual increases or market reviews. That stability suits members who may be posted interstate or deployed and cannot actively manage a property.

What Qualifies as Business Real Property for SMSF Borrowing

A property qualifies as business real property when it is used wholly and exclusively in one or more businesses. The business does not need to be operated by the SMSF or the member. A warehouse leased to a logistics company qualifies. A factory leased to a manufacturer qualifies. An office leased to an accounting firm qualifies. The test is actual use, not zoning or marketing description.

A property marketed as commercial but used partly for residential purposes may not meet the definition. Mixed-use properties require specific assessment. A unit with a mezzanine office and a small caretaker flat may fail the wholly and exclusively test unless the residential component is clearly incidental to the primary business use. The ATO guidance in SMSFR 2009/1 sets out detailed examples. If the property has any residential element, obtain advice from an SMSF specialist before proceeding.

In our experience, industrial properties near RAAF Base Laverton in areas like Laverton North and Altona North are typically single-use facilities. Zoning in these precincts supports warehousing, light manufacturing, and logistics. Properties are leased to businesses operating in those sectors, which aligns with the business real property definition.

Deposit and Loan-to-Value Ratio Requirements

Most lenders offering SMSF commercial loans lend up to 70 percent of the property value. Some lenders may go to 80 percent in specific circumstances, particularly where the property is leased to a tenant with a strong credit profile or where the lease term is long. A 70 percent loan-to-value ratio means the SMSF must provide a 30 percent deposit plus settlement costs.

Settlement costs for commercial property include stamp duty, legal fees, valuation fees, and loan establishment costs. Stamp duty in Victoria on commercial property is calculated differently to residential property and may attract higher rates depending on the purchase price and the property's use. Borrowed funds under the LRBA can be used to cover stamp duty and other acquisition costs, but they cannot be used to improve the property after settlement.

Consider an SMSF with $600,000 in accumulation phase purchasing a $700,000 industrial unit in Sunshine. At 70 percent LVR, the loan amount is $490,000. The deposit is $210,000. Settlement costs including stamp duty, legal fees, and loan costs might add another $40,000 to $50,000. The total cash requirement from the SMSF is approximately $250,000 to $260,000. The remaining balance stays in the fund for liquidity and compliance.

How Rental Income and Capital Gains Are Taxed in Your SMSF

Rental income from an industrial property held in an SMSF is taxed at 15 percent during accumulation phase. Allowable deductions include interest on the LRBA loan, property management fees, repairs and maintenance, council rates, insurance, and capital works deductions. The net rental income after deductions is added to the fund's assessable income and taxed accordingly.

Where the property is sold after being held for at least 12 months, a one-third capital gains tax discount may apply. That can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax depends on the property's adjusted cost base, selling costs, capital improvements, and whether the fund has capital losses to offset. Capital losses can only be offset against capital gains, not against rental income or other assessable income.

If the SMSF has commenced a pension and the property is supporting a retirement-phase income stream, exempt current pension income (ECPI) rules may apply. Where the fund's assets are fully segregated as pension assets, capital gains on disposal are disregarded. Where the fund uses the proportionate method, only the exempt proportion of the gain is disregarded. This depends on whether the fund holds both accumulation and pension interests, the transfer balance cap, and whether an actuarial certificate is required.

From 1 July 2026, Division 296 tax applies where a member's total superannuation balance exceeds $3 million. An additional 10 percent Division 296 tax applies to earnings above $10 million. Unrealised gains do not form part of the Division 296 calculation. Only realised rental income and capital gains contribute to the earnings base. LRBA amounts are disregarded when calculating the member's total superannuation balance for Division 296 purposes.

Setting Up the Limited Recourse Borrowing Arrangement and Bare Trust

The property must be held in a bare trust, with the SMSF holding a beneficial interest. The SMSF trustee enters into the loan agreement with the lender. The bare trustee holds legal title to the property until the loan is repaid. If the loan defaults, the lender's recourse is limited to the property held in the bare trust. The lender cannot pursue other SMSF assets.

The bare trust deed, loan agreement, and LRBA documentation must be drafted to comply with sections 67A and 67B of the SIS Act. The borrowed funds must be used to acquire a single asset. Multiple properties on separate titles cannot be acquired under a single LRBA, even if they are substantially similar. An exception exists where the properties are distinctly identifiable as a single asset, meaning they have equal market value and are bought and sold together, but this exception is narrow.

Borrowed funds cannot be used to improve the property after acquisition. This restriction applies to LRBAs entered into on or after 7 July 2010. Repairs and maintenance are permitted, but capital improvements such as extensions, fit-outs, or structural modifications cannot be funded by drawdowns under the LRBA. If improvements are required, they must be funded from the SMSF's existing cash reserves.

Members considering investment loans for properties outside super should compare the tax treatment, flexibility, and borrowing capacity. SMSF loans are more restrictive but offer concessional tax rates on rental income and capital gains.

Related Party Leasing and Arm's Length Terms

Business real property leased between the SMSF and a related party is excluded from the in-house asset rules, but the lease must be on arm's length terms at market value. A related party includes the member, the member's spouse, children, business partners, and entities controlled by those parties.

If a member operates a business and the SMSF purchases an industrial property to lease back to that business, the arrangement is permitted provided the rent is at market rates, the lease terms are commercial, and the property qualifies as business real property. The ATO scrutinises related party leases. Rent must be paid on time, lease documentation must be formal, and the terms must reflect what an independent tenant would accept.

Any income derived from a non-arm's length arrangement may be taxed as non-arm's length income at 45 percent. This rate applies to both the income itself and, from 1 July 2026, to any subsequent ordinary or statutory income derived from that non-arm's length income. Related party leasing is lawful, but the compliance requirements are strict.

Refinancing an Existing SMSF Loan After the Residential Restriction

Existing residential LRBAs entered into before approximately 10 August 2026 can be maintained or refinanced without breaching the new restriction. The law protects certain existing arrangements and eligible refinancings. Whether a refinancing is treated as maintaining an existing arrangement or entering a new one depends on the circumstances and documentation.

The ATO had not published updated guidance on the scope of permitted refinancing as at 22 July 2026. Practical Compliance Guideline PCG 2016/5 sets out arm's length terms for SMSF LRBAs and remains current. A significant change to the terms or conditions of an LRBA may end the original arrangement and create a new one. Refinancing that is inconsistent with the original arrangement, borrowing to acquire a different asset, or changes to the ultimate beneficiaries may trigger a new arrangement.

Commercial LRBA refinancing is not affected by the 2026 restriction. Compliance conditions continue to apply. The refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character, and meet arm's length terms consistent with PCG 2016/5. Safe harbour interest rates are published annually by the ATO and apply to both real property and listed securities.

Members holding existing residential property in their SMSF and considering switching to industrial property may benefit from a loan health check to assess refinancing options and compliance with current SMSF rules.

Contributions and Borrowing Capacity for Members with Large Balances

The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. The general transfer balance cap is $2.1 million. Members commencing a pension for the first time after 1 July 2026 have a personal transfer balance cap of $2.1 million.

The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where the member's total superannuation balance on 30 June of the previous year was below $1.84 million. Where the balance was between $1.84 million and $1.97 million, the bring-forward limit is $260,000 over two years. Where the balance was between $1.97 million and $2.1 million, only the annual cap of $130,000 applies. Where the balance equalled or exceeded $2.1 million, the non-concessional contributions cap is nil.

A member with a total superannuation balance of $1.5 million on 30 June 2026 can trigger the bring-forward and contribute up to $390,000 in non-concessional contributions over the following three years. That additional capital can be used to fund a deposit on industrial property or to pay down an existing LRBA loan. Members approaching the balance thresholds should plan contributions carefully to avoid breaching the cap.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can arrange the structure, lender comparison, and documentation required to purchase industrial property through your self-managed super fund.

Frequently Asked Questions