When to Use an SMSF Loan for Mixed-Use Property

Can You Still Use an SMSF Loan to Buy Mixed-Use Property?

Mixed-use property with a commercial and residential component can be purchased using a Limited Recourse Borrowing Arrangement, but only if the property meets the business real property definition under section 66 of the SIS Act. From approximately 10 August 2026, new SMSF loans can only be used to acquire real property used wholly and exclusively in one or more businesses. A property with a residential component may not qualify, or may only partially qualify, depending on how the property is actually used.

The restriction applies to new borrowing arrangements involving residential property. It does not prevent SMSFs from owning residential property outright or acquiring it without borrowing, provided the property is not acquired from a related party and is not occupied by a fund member or their relatives. Whether a mixed-use property qualifies for SMSF borrowing depends on the nature and actual use of the property at the time of acquisition, not on how it is marketed or zoned.

Consider a former ADF member who identifies a shopfront property with an attached upstairs apartment. The ground floor is leased to a retail tenant on a three-year commercial lease. The upstairs apartment is currently leased on a residential tenancy. The property is marketed as a mixed-use investment with dual income streams. Under the business real property definition, land and buildings must be used wholly and exclusively in one or more businesses. The residential tenancy would cause the property to fail that test. The SMSF could not use an LRBA to acquire the entire property after the commencement date of the new rules.

A concession exists for certain primary production property, under which a dwelling occupying no more than 2 hectares does not cause the property to fail the wholly and exclusively test, provided the main use of the whole property is not domestic or private. This concession applies to primary production property and is not a general exemption for all mixed-use properties. If you are considering a rural property with both commercial and residential use, specialist advice is required to determine whether the concession applies.

What Qualifies as Business Real Property After August 2026

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the entity holding the interest in the property. A warehouse leased to a third-party logistics company qualifies. A medical consulting suite leased to a group practice qualifies. A retail premises leased to an independent retailer qualifies. A residential tenancy does not qualify.

Whether a property satisfies the definition is a question of fact based on its actual use. A property marketed or described as commercial does not automatically satisfy the definition. Zoning is not determinative. A building zoned for commercial use but leased to a residential tenant would not meet the test. The ATO's guidance in SMSFR 2009/1 sets out detailed examples, including properties used for professional consulting rooms, medical practices, retail shops, warehouses, and factories.

In our experience, the most common issue with mixed-use property arises where a commercial building includes a residential caretaker's unit or manager's apartment. Whether this causes the property to fail the wholly and exclusively test depends on the specific circumstances, including the size and nature of the residential component relative to the commercial component, whether the residential use is incidental to the primary business use, and the terms of any relevant lease or occupancy arrangement. The question is not whether the residential component exists, but whether it prevents the property from being used wholly and exclusively in a business.

For ADF members considering an SMSF loan for a property with any residential component or use, detailed advice from a licensed SMSF specialist is required before proceeding. The legislative change restricts certain new borrowing arrangements from approximately 10 August 2026. Whether an arrangement has legally been entered into depends on the surrounding circumstances and documentation, not solely on the exchange of a contract. Timing matters.

How the Single Asset Rule Affects Mixed-Use Property on Multiple Titles

An SMSF loan must be used to acquire a single asset. Multiple real property titles cannot be acquired under a single LRBA unless the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together. Properties on separate titles do not qualify even if substantially similar.

A mixed-use property on a single title that meets the business real property definition can be acquired under an LRBA. A mixed-use property split across two titles cannot be acquired under a single LRBA, even if both titles are used wholly and exclusively in a business. Separate LRBAs for each title would be required, subject to lender willingness and compliance with the SIS Act.

Borrowed funds cannot be used to improve an existing asset. An existing fund asset cannot be placed into an LRBA. Drawdowns for capital improvements are not permitted for LRBAs entered into on or after 7 July 2010. Where a property requires significant work to become suitable for commercial leasing, those works must be funded from the SMSF's other cash reserves or member contributions, not from the LRBA. Where a property is purchased in a condition suitable for immediate commercial use, ongoing repairs and maintenance can be funded from rental income or other SMSF cash, but capital improvements cannot be funded by increasing the LRBA.

SMSF Tax on Rental Income and Capital Gains from Commercial Property

Rental income from commercial property held in an SMSF accumulation account is taxed at 15 percent. Where the property supports a retirement-phase income stream and the fund's assets are fully segregated as current pension assets, rental income may be exempt. Where the fund uses the proportionate method, the exemption applies to only the exempt proportion of the rental income, as determined by an actuarial certificate. The outcome depends on the method used to calculate exempt current pension income, the transfer balance cap, whether minimum pension payment requirements have been satisfied, and the fund's specific circumstances.

Where an eligible asset has been held for at least 12 months, a one-third capital gains tax discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax liability varies depending on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year. Capital losses cannot be claimed against income and can only be offset against capital gains.

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds $3 million, 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 Division 296 tax applies to earnings above that threshold. A capital gain must be realised through a CGT event for it to form part of the fund's assessable income and therefore the Division 296 earnings base. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings. Rental income and realised capital gains may contribute to the Division 296 calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

An SMSF may elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June 2026. This election recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. The election applies only for the purpose of working out Division 296 fund earnings.

Leasing SMSF Commercial Property to a Related Party

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. Any such lease must be made on arm's length terms at market value. A related party includes the member, their spouse, their children, their business partners, and any entities controlled by those persons.

Consider a serving ADF member who operates a contracting business through a family company. The member's SMSF borrows to acquire a commercial workshop and yard. The SMSF leases the property to the member's family company under a formal commercial lease at market rent, independently valued and reviewed annually. The arrangement is excluded from the in-house asset rules because the property meets the business real property definition and the lease is on arm's length terms. The rental income is assessable in the SMSF at 15 percent where held in accumulation phase, or may be exempt where the property supports a retirement-phase income stream, subject to the ECPI rules.

Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate of 45 percent. The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5, updated annually, applying to both real property and listed securities. Where a related party lender is involved, the loan must meet the safe harbour terms or be independently assessed as arm's length. A related party may provide a personal guarantee to the lender, but their recourse must be limited to the asset under the arrangement and not any other SMSF assets.

For current and former ADF members using an SMSF to hold commercial property leased to a related entity, the lease must be documented, independently valued, reviewed regularly, and paid on time. Failure to maintain arm's length terms can result in significant tax penalties and regulatory consequences. Where the lease involves a member's employer or a business in which the member has a controlling interest, the arrangement must be structured and documented before the property is acquired. Retrospective correction is not possible where the property has already been acquired using an LRBA that does not meet the business real property test.

Refinancing an Existing SMSF Loan After the Residential Borrowing Restriction

The restriction on new residential LRBAs does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at 22 July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new LRBA under the post-commencement rules. Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Circumstances that may end an existing arrangement 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.

For ADF members with an existing residential SMSF loan entered into before approximately 10 August 2026, refinancing to a different lender or adjusting the loan terms may be possible, but the refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms consistent with PCG 2016/5. Where the refinancing involves a material change to the arrangement, such as adding a new property or increasing the loan beyond the original borrowing purpose, it may be treated as a new arrangement and therefore subject to the post-commencement rules.

Refinancing of commercial LRBA arrangements is not affected by the restriction. Compliance conditions continue to apply, including that the refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms. In the event of a default, recourse of the lender against the SMSF trustees must be limited to the asset being acquired under the arrangement. Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Australia, including current and former ADF members, to structure compliant borrowing arrangements for commercial property and to assess whether a mixed-use property qualifies for SMSF borrowing under the post-commencement rules.

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