Common Mistakes When Buying an Office with Super

Purchasing an office building through your SMSF remains one of the few property strategies unaffected by recent changes to superannuation borrowing rules.

From approximately 10 August 2026, new limited recourse borrowing arrangements involving residential property are no longer permitted under the SIS Act. Commercial property that satisfies the business real property definition under section 66 continues to be an eligible asset for SMSF borrowing. This distinction matters for fund trustees considering property acquisitions in industrial areas such as Cornubia, where logistics facilities, warehouses, and office premises continue to attract business tenants seeking proximity to the M1 and Gateway Motorway.

The decision to borrow through your SMSF to acquire commercial premises carries financial and compliance obligations that differ substantially from a standard commercial loan outside superannuation. Understanding the structure, costs, and restrictions before committing to a purchase determines whether the acquisition supports your retirement strategy or creates ongoing compliance risk.

What Qualifies as Business Real Property Under Section 66

Business real property means land and buildings used wholly and exclusively in one or more businesses. The property must be in actual business use at the time your SMSF acquires it, and that use must continue throughout the period your fund holds the asset. Whether a property meets this definition is a question of fact, not a question of how the property is marketed or zoned.

Consider a trustee purchasing a small office building in Cornubia's Pacific Highway commercial precinct. The property is tenanted by a single business using the premises for administration and client meetings. The entire building is used for business purposes, with no residential component or private use by a related party. That property satisfies the definition. If the same building contained a caretaker's residence occupying part of the ground floor, the residential component may cause the property to fail the wholly and exclusively test unless a specific exemption applies.

Mixed-use properties require detailed assessment. A concession exists for primary production property where a dwelling occupying no more than 2 hectares does not disrupt the test, provided the main use of the whole property is not domestic or private. This concession does not extend to commercial properties with a residential component in suburban business parks. SMSFR 2009/1 provides detailed guidance and examples on the business real property definition.

How the Limited Recourse Borrowing Arrangement Works

The property is held in a separate holding trust, commonly called a bare trust. Your SMSF acquires a beneficial interest in the property and obtains legal ownership after the loan is fully repaid. If the loan defaults, the lender's recourse is limited to the asset held in the trust and does not extend to other SMSF assets.

The borrowed funds must be used to acquire a single asset. Multiple properties on separate titles cannot be purchased under a single LRBA, even if they are substantially similar or adjacent. Loan proceeds can cover the purchase price, loan establishment costs, and stamp duty. Borrowed funds cannot be used to improve an existing asset or fund capital works on a property already held by your SMSF.

An existing fund asset cannot be transferred into an LRBA structure. Drawdowns for capital improvements are prohibited for arrangements entered into on or after 7 July 2010. If your fund requires capital to undertake building works or fit-outs, those funds must come from contributions, rollovers, or retained earnings within the fund.

Deposit Requirements and Loan-to-Value Ratios for Commercial LRBAs

Lenders offering SMSF loans typically require a deposit between 30 and 40 percent of the property's purchase price for commercial assets. Some lenders impose a maximum loan-to-value ratio of 70 percent, while others may lend up to 80 percent where the asset meets specific criteria and the fund demonstrates sufficient liquidity.

Your SMSF must have adequate cash or liquid assets to meet the deposit, settlement costs, and ongoing loan servicing obligations without breaching contribution caps or relying on future contributions that have not yet been made. Borrowing capacity depends on the fund's rental income from the property, any other investment income, and the member contributions projected over the loan term. Lenders assess serviceability based on the fund's financial position, not the personal income of individual members.

In a scenario where a Cornubia-based business owner wishes to purchase their operating premises through their SMSF, the fund must hold sufficient capital to meet the deposit and associated costs before exchange of contracts. If the fund balance is insufficient, the trustee may need to make personal concessional or non-concessional contributions to the fund before settlement. From 1 July 2026, the concessional contributions cap is $32,500 per annum and the non-concessional contributions cap is $130,000 per annum. The bring-forward arrangement allows larger non-concessional contributions over a three-year period, subject to the member's total superannuation balance on 30 June of the previous year.

Rental Income, Related Party Leasing, and Arm's Length Terms

Where your SMSF owns an office building and leases it to a business controlled by a fund member or a related party, that lease must be made on arm's length terms at market value. Business real property leased between the fund and a related party is excluded from the in-house asset rules, but the exemption applies only if the lease reflects commercial terms.

A lease agreement that does not meet arm's length terms exposes the fund to non-arm's length income treatment, under which rental income is taxed at 45 percent rather than the concessional rate of 15 percent. PCG 2016/5 sets out safe harbour terms for SMSF LRBAs, including interest rates, and applies to trustees regardless of when the arrangement commenced. While PCG 2016/5 focuses primarily on loan terms, the principle of arm's length dealing extends to all transactions between the fund and related parties.

Market rent must be determined by reference to comparable properties in the same location and condition. In Cornubia, where industrial and logistics tenants dominate, rental rates vary depending on the size, age, and location of the premises. A property fronting the Pacific Highway with ample parking commands a different rental rate than a smaller office unit in a mixed-use estate further from arterial access. Obtaining a rental appraisal from a licensed valuer or property manager provides evidence that the lease meets commercial terms.

Capital Gains Tax and Division 296 Tax from 1 July 2026

A complying SMSF is taxed at 15 percent on its assessable income, including net capital gains. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends 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.

Where the fund is in pension phase and its assets are fully segregated as current pension assets, a capital gain on disposal is disregarded. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.

From 1 July 2026, Division 296 tax applies 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. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes. Rental income and realised capital gains contribute to the Division 296 earnings base. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings.

Sole Purpose Test and Prohibited Use of the Property

Your SMSF must be maintained for the sole purpose of providing retirement benefits to members. Acquiring property that provides a present-day benefit to a member or related party breaches the sole purpose test. The office building cannot be occupied by a fund member for private or domestic purposes. It can be leased to a business controlled by a member, provided the lease meets arm's length terms and the property satisfies the business real property definition.

A property marketed as commercial that is subsequently converted to residential use or used for purposes that do not satisfy the business real property definition creates a compliance breach. Trustees are responsible for monitoring the use of the property throughout the period it is held by the fund. A change in use may require the property to be sold or the loan to be repaid, depending on the circumstances and the terms of the LRBA.

Refinancing and When an Existing Arrangement Ends

The 2026 restriction on new residential LRBAs provides that the restriction 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.

Refinancing of commercial loans held within an SMSF 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 of the original arrangement, and meet arm's length terms consistent with PCG 2016/5. A significant change to the terms or conditions of an LRBA may end the existing arrangement and create a new one. Circumstances that may end an 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.

Where you are considering refinancing an existing SMSF borrowing, obtain advice from a licensed SMSF specialist and legal practitioner before proceeding. The consequences of inadvertently creating a new arrangement after the commencement date depend on whether the property is residential or commercial and whether transitional provisions apply.

Settlement Timing and Fund Liquidity

Your SMSF must have sufficient liquidity to meet settlement costs, ongoing loan repayments, and the fund's operating expenses without relying on future contributions that have not yet been received. Settlement costs include stamp duty, legal fees, valuation fees, and trust establishment costs for the bare trust.

Where a fund's only significant asset is the commercial property secured by the LRBA, the fund may face liquidity constraints if rental income is insufficient to meet loan repayments and operating expenses. This risk increases where the property becomes vacant or the tenant defaults on rent. A fund holding a diversified portfolio of assets has greater capacity to manage short-term income fluctuations without breaching its obligations to the lender or the ATO.

Trustees should model the fund's projected cash flow over the loan term, including rental income, member contributions, loan repayments, fund expenses, and minimum pension payments where applicable. A fund that cannot meet its loan obligations without breaching contribution caps or the sole purpose test is not in a position to proceed with the acquisition.

Call one of our team or book an appointment at a time that works for you. Wagstaff Finance works with SMSF trustees in Cornubia and across South East Queensland to structure commercial property loans that meet compliance obligations and support long-term retirement strategies.

Frequently Asked Questions