The Pros and Cons of SMSF Loans for Retail Property

Self-Managed Super Funds can still borrow to purchase retail property through a Limited Recourse Borrowing Arrangement, but the recent residential ban has changed the landscape considerably.

The Australian Government confirmed on 23 June that new LRBAs used by SMSFs to purchase residential property will be banned from mid-August onwards. Commercial property, including retail premises, remains available. For Pascoe Vale trustees considering a retail investment along Glenroy Road or within the surrounding commercial precincts, the structure, compliance requirements, and lender expectations are more demanding than they were twelve months ago.

What a Limited Recourse Borrowing Arrangement Actually Means

A Limited Recourse Borrowing Arrangement allows your SMSF to borrow money to purchase a single asset, held in a bare trust until the loan is repaid. The lender's recourse is limited to that asset alone, meaning other fund assets remain protected if the loan defaults.

Each loan covers one property in one bare trust. If your fund wants to acquire two retail units, you need two separate arrangements. The property must meet the sole purpose test, existing purely to generate retirement benefits for fund members. You cannot occupy the premises yourself or allow a related party to use it unless strict exemptions apply. Rental income is taxed at 15% in accumulation phase, and capital gains attract an effective 10% discount when the fund is in that same phase.

Lenders now scrutinise post-settlement liquidity closely. Funds must demonstrate a cash buffer, often 5% to 10% of the asset value, to cover unforeseen expenses such as vacancy periods, repairs, or rates. This requirement has tightened considerably as regulators increase transaction monitoring and data-matching across SMSF borrowing arrangements.

LVRs and Deposit Requirements for Retail Property Purchases

Non-bank and specialist lenders are offering LVRs up to 80% for commercial property investments, up from the historically conservative range of around 60% to 70%. For retail property specifically, LVRs typically sit between 65% and 75%, depending on the asset class, location, and tenant profile.

Consider a trustee purchasing a retail premises in Pascoe Vale. The property is tenanted by an established business with a lease in place. A lender might offer 70% LVR, requiring a 30% deposit from the fund's existing cash or assets. If the fund balance sits at $400,000 and the property is offered at the current market rate for a similar asset in the area, the trustee would need to allocate a significant portion of the fund to settlement, then retain sufficient liquidity post-purchase to satisfy the lender's cash buffer requirement. Many trustees underestimate this second component, focusing only on the deposit and overlooking the ongoing reserve.

Deposit requirements are non-negotiable. Unlike owner-occupied or investment loans where genuine savings can sometimes be supplemented with a family guarantee, SMSF lenders require the deposit to come directly from the fund. Contributions can be made in the lead-up to settlement, provided they comply with contribution caps and the fund's investment strategy.

The Sole Purpose Test and Related Party Leases

The property must exist purely to generate retirement benefits. You cannot lease a retail premises to your own business or a company you control unless it falls under the in-house asset exemption for business real property. That exemption applies when the property is used wholly and exclusively in a business, but the rules are strict and require the lease to be on arm's length terms.

SMSFs are restricted from holding more than 5% of their total assets in in-house assets. A lease to a related party may breach this threshold unless the business real property exemption applies. The line between what qualifies and what doesn't is narrow, and many trustees cross it without realising the implications.

In our experience, trustees purchasing retail property in Pascoe Vale with the intention of leasing it to their own business often assume the exemption applies automatically. It doesn't. The lease terms, rental rate, and use of the premises must all be demonstrably commercial. If the rent is below market, or the business uses only part of the premises while another part sits vacant or is used for storage unrelated to the business, the exemption may not hold.

Safe Harbour Rates and Arm's Length Requirements

For the current financial year, the safe harbour interest rate for LRBAs used to acquire real property is 8.95%, down from 9.35% the previous year. These rates apply to related-party LRBAs to ensure loan terms are on an arm's length basis.

If your SMSF borrows from a related party, the loan must comply with ATO PCG 2016/5. The interest rate must be at or above the safe harbour rate, the loan must be documented with a formal agreement, and repayments must be made as scheduled. Non-compliance can result in the arrangement being treated as a non-arm's length income event, triggering tax at the top marginal rate on all income derived from the asset.

Most trustees using a commercial lender won't need to worry about safe harbour rates, but those structuring internal loans or borrowing from a related trust must document everything rigorously. The ATO's data-matching has intensified, and any discrepancy between reported loan terms and actual payments will attract scrutiny.

Compliance Training and Record-Keeping Obligations

New rules require trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance may result in penalties of up to $19,800, or fund disqualification in severe cases.

This training requirement is not optional. Trustees who entered into LRBAs before the rule change must still complete the course. The obligation extends to all trustees of the fund, not just the primary decision-maker. For a two-member fund, both members must be certified.

Record-keeping standards have also been elevated. Each LRBA requires a separate trust deed, loan agreement, and property title arrangement. You must retain evidence of market valuations, rental assessments, and compliance with the sole purpose test. When a fund holds a retail property in Pascoe Vale leased to a third-party tenant, the trustee must document the tenant's lease terms, rental reviews, and any negotiations around repairs or fitouts. If the lease allows the tenant to make alterations, those alterations cannot change the fundamental character of the property while the loan is outstanding.

What You Can and Cannot Do While the Loan Is Active

You cannot use the LRBA to fund structural improvements or anything that changes the fundamental character of the property while the loan is outstanding. Repairs and maintenance are permitted, but structural changes are not.

This distinction catches many trustees off guard. Repainting, fixing a roof leak, or replacing carpet all qualify as maintenance. Knocking down an internal wall to create an open-plan layout, adding a mezzanine, or constructing additional storage does not. The asset must remain a single acquirable asset in its original form until the loan is repaid.

If a tenant requests a fitout as part of their lease negotiation, the cost must come from the fund's cash reserves, not the loan. The lender will not advance additional funds for this purpose under an LRBA structure. If the fund lacks sufficient liquidity to cover the fitout, the trustee must either decline the request, renegotiate the lease, or consider whether the investment is viable.

Refinancing an Existing LRBA After the Residential Ban

An SMSF can refinance an existing LRBA. The refinance must comply with ATO PCG 2016/5 if the original loan was internal, and with section 67A more broadly. The fund refinances the same single acquirable asset on new terms with a new lender, the bare trust stays in place, and lender-to-lender stamp duty is generally avoided because the underlying legal title does not move.

Commercial property LRBAs are unaffected by the residential ban, and refinancing of existing commercial LRBAs remains available under current rules. For residential LRBAs entered into before mid-August, existing arrangements are fully grandfathered, including for future refinancing. However, whether a refinance of an existing residential LRBA is treated as a new LRBA is not yet settled by the ATO. Trustees should not restructure unnecessarily until specific legal advice has been obtained.

Refinancing makes sense when rates have shifted, when the fund's liquidity position has improved and a higher LVR is no longer necessary, or when the original lender's terms have become uncompetitive. Lenders now expect the same post-settlement cash buffer on a refinance as they do on a new purchase, so any refinance must account for that liquidity requirement in addition to settlement costs.

Why Working With an SMSF Mortgage Broker Matters

Lenders assess SMSF loan applications differently to standard investment or commercial loans. They review the fund's trust deed, investment strategy, and compliance history. They assess the trustees' ability to manage cash flow, the property's income profile, and whether the fund can sustain the loan through vacancy or tenant default.

An SMSF mortgage broker who understands these lender requirements can structure the application to address each point before submission. That includes ensuring the fund's investment strategy explicitly permits property acquisition via borrowing, confirming the trustees have completed or are enrolled in certified training, and demonstrating post-settlement liquidity through cash flow projections.

For Pascoe Vale trustees, local knowledge adds another layer. A broker familiar with the Glenroy Road commercial precinct, the mix of retail tenants, and the rental yields in the area can match the property type to lenders who actively write in that location. Not all lenders treat retail property equally. Some prefer high-street retail with national tenants, others are comfortable with smaller neighbourhood shops provided the lease term and tenant strength are sufficient.

Call one of our team or book an appointment at a time that works for you. We'll review your fund's position, walk through the compliance requirements, and compare SMSF lenders to find a structure that aligns with your retirement strategy and the property you're considering.

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