Buying a Commercial Property with Your SMSF
Investing in commercial property through a Self-Managed Super Fund (SMSF) can be a smart way to build long-term wealth for retirement.
Unlike residential property, commercial property offers greater flexibility, including the ability to lease it to your own business—provided it complies with ATO regulations.
At HelloLedger, we assist SMSF trustees with the compliance, reporting, and administration required when purchasing commercial property, ensuring the process is stress-free and ATO-compliant.
Can an SMSF Buy Commercial Property?
Yes, an SMSF can buy commercial property, provided it meets superannuation laws and complies with the Sole Purpose Test, which ensures the property is used solely to provide retirement benefits to members.
Commercial property investments are more flexible than residential property because:
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SMSFs can lease commercial properties to related parties, such as a trustee’s business, as long as the lease is on commercial terms (market rates).
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The property can be purchased using a Limited Recourse Borrowing Arrangement (LRBA).
Key Compliance Rules for SMSF Commercial Property Investments
1. Sole Purpose Test
The property must be used solely to provide retirement benefits to SMSF members.
2. Arm’s Length Transactions
If the property is leased to a related party (e.g., your business), it must:
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Be rented at market value.
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Follow commercial lease agreements and payment terms.
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Maintain proper records to demonstrate compliance.
3. Borrowing to Purchase Commercial Property
SMSFs can borrow funds to buy commercial property using a Limited Recourse Borrowing Arrangement (LRBA).
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Loans must be non-recourse, meaning the lender’s claim is limited to the property, not the SMSF’s other assets.
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The property is held in a bare trust until the loan is repaid.
4. Property Management and Expenses
All income, such as rent, must be deposited into the SMSF’s bank account. Expenses—including repairs, rates, and insurance—must also be paid directly from the SMSF.
Advantages of Buying Commercial Property with an SMSF
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Lease to Your Own Business
SMSFs can lease commercial property to a trustee’s business, providing both retirement savings and business premises—all while benefiting from rental income at market rates.
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Tax Benefits
- Rental income is taxed at a concessional rate of 15% in the accumulation phase and may be tax-free in the pension phase.
- Capital gains tax (CGT) is reduced to 10% if the property is held for more than 12 months.
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Control Over Investments
SMSFs provide direct control over property investments, allowing trustees to diversify their portfolios and tailor investments to suit their goals.
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Potential for Growth
Commercial properties can generate steady rental income and capital growth, making them attractive options for long-term wealth building.
Important Considerations Before Investing
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Liquidity Risks:
Commercial properties are illiquid, meaning they may not be easily sold to pay benefits when members retire.
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Borrowing Risks:
Loans under LRBAs can increase financial risks if the property value falls.
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Ongoing Costs:
Trustees must budget for maintenance, insurance, and loan repayments from the SMSF’s funds.
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Compliance Obligations:
SMSFs must maintain detailed records, including leases, income statements, and valuations, to pass annual audits.
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Valuation Requirements:
SMSFs must value the property at market value annually for reporting and audit purposes.
HelloLedger provides compliance support, loan documentation assistance, and ongoing reporting services to help trustees manage these challenges.
Buying Residential Property with an SMSF
FAQs
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Can I lease commercial property owned by my SMSF to my business?
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Yes, your SMSF can lease commercial property to your business, but it must be on commercial terms at market rent, and formal lease agreements must be in place.
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What happens if I breach the leasing rules?
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Non-compliance, such as undercharging rent or not having a lease agreement, can result in ATO penalties and the fund being declared non-compliant.
Can I develop or renovate a commercial property in my SMSF?
Renovations are allowed if funds are available within the SMSF, but any improvements funded by borrowing under an LRBA may breach borrowing rules.
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Can my SMSF borrow money to buy commercial property?
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Yes, SMSFs can use a Limited Recourse Borrowing Arrangement (LRBA) to borrow funds, but the property must be held in a separate bare trust until the loan is repaid.
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Are rental earnings from commercial property taxed?
Yes, rental income is taxed at a concessional rate of 15% in the accumulation phase and can be tax-free in the pension phase.
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Does the property need to be valued annually?
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Yes, SMSFs must value commercial property at market value every year for audit and reporting purposes.