Simple hacks to fund a smaller dwelling with your SMSF

The option to borrow within your SMSF for residential property closed in August 2026.

Commercial property remains one of the few asset classes where trustees can still use borrowed funds within a Self-Managed Super Fund. For members looking to acquire a smaller commercial dwelling through their fund, the legislative framework has become more focused, not more flexible.

Commercial property still qualifies for SMSF borrowing

Limited recourse borrowing arrangements for commercial property that satisfies the definition of business real property under section 66 of the SIS Act are not affected by the 2026 restriction on residential property. The property must be used wholly and exclusively in one or more businesses. Whether a property qualifies is determined by its actual use at the time of acquisition, not how it is marketed.

Consider a Coomera trustee acquiring a small industrial unit on the northern end of the suburb near Foxwell Road. The unit is leased to a third-party logistics business operating from the premises. The tenant runs a distribution operation from the property. The use is commercial, the lease is at arm's length, and the property satisfies the business real property definition.

The SMSF establishes a limited recourse borrowing arrangement with a lender. The property is held in a bare trust. The SMSF acquires a beneficial interest in the unit and obtains legal ownership once the loan is repaid. If the loan defaults, only the asset held in trust is at risk. Rental income from the tenant flows to the SMSF.

The trustee arranged a 70 percent loan-to-value ratio, requiring a 30 percent deposit from the fund's existing cash reserves. The interest rate was set in line with the ATO's safe harbour rates under PCG 2016/5. The loan met the arm's length conditions, and the arrangement was documented through a separate holding trust and custodian trustee.

Mixed-use properties require careful assessment

A property with both commercial and residential components may not qualify as business real property, or may only partially qualify, depending on the specific circumstances. Whether a property satisfies the wholly and exclusively test is a question of fact.

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 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.

A Coomera property zoned as mixed-use near the Westfield town centre may include a ground-floor retail tenancy and a separate residential apartment on the upper level. The residential component would prevent the property from satisfying the business real property definition. The SMSF could not acquire the entire property under a commercial loan arrangement. The trustee would need to acquire the commercial portion separately if it was on a separate title, or acquire the property without borrowing.

Single asset requirement restricts multiple titles

Multiple real property titles cannot be acquired under a single LRBA. An exception applies where 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.

In the Coomera industrial precinct, a trustee may identify two adjoining warehouse units on separate titles, each with similar rent and market value. The units are leased to different tenants and can be sold separately. The properties do not meet the single asset test. The trustee would need to establish two separate LRBA structures, each with its own holding trust, or acquire one unit only.

Capital gains tax depends on the fund's phase

A complying SMSF is taxed at a concessional rate of 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, 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.

A capital gain is not automatically tax-free because an SMSF has commenced a pension. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income. Where a fund's assets are fully segregated as current pension assets, a capital gain on disposal of those assets is disregarded. Where the fund uses the proportionate method, the exemption applies to only the exempt proportion of the net capital gain, as determined by an actuarial certificate.

In our Coomera example, the trustee held the industrial unit in accumulation phase for six years. The property was then allocated to support a pension for the member. The fund's assets were fully segregated as current pension assets. When the property was sold, the capital gain was disregarded for tax purposes. Had the fund held both accumulation and pension interests, the exemption would have been partial, calculated using the proportionate method.

Division 296 tax applies to high-balance members from 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.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. 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. Division 296 tax assessments for the 2026-27 income year are expected to begin issuing in the second half of the 2027-28 income year.

Related party leasing must meet arm's length terms

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. 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.

A Coomera trustee whose SMSF owns a small commercial property near the M1 corridor may lease the premises to a business controlled by the member. The lease must be documented, reflect market rent, include appropriate review clauses, and meet the same conditions as a lease with an unrelated tenant. Independent valuation evidence supports the rent. The trustee reviews the lease annually and adjusts the rent in line with market movements.

Where the lease is not on arm's length terms, rental income may be assessed as non-arm's length income. The 45 percent tax rate applies to that income, rather than the concessional 15 percent rate.

Refinancing an existing commercial LRBA

Refinancing of commercial LRBA arrangements is not affected by the 2026 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 consistent with PCG 2016/5.

The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5, updated annually, applying to both real property and listed securities. PCG 2016/5 applies to SMSF trustees who have established LRBAs regardless of whether the arrangement commenced before or after the date of publication of that guideline.

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. Trustees should obtain specialist legal advice before assuming a transaction qualifies for transitional protection or constitutes a valid refinancing under the post-commencement rules.

Commercial property acquisition through an SMSF requires documentation that reflects the actual legal and tax position. Trustees in Coomera looking to acquire a smaller commercial dwelling through their fund should work with a licensed SMSF specialist and a mortgage broker who understands the legislative framework and lender requirements for limited recourse borrowing arrangements.

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