Top Strategies to Buy Investment Property with SMSF

The Australian Government banned new residential property LRBAs on 23 June 2026, but commercial property remains available for SMSF borrowing.

If you're a litigation lawyer with a material balance in superannuation and looking to diversify into property, you need to understand what's still accessible and what's grandfathered. The residential LRBA ban applies prospectively. Contracts signed before the legislation received royal assent are unaffected. Settlement date is irrelevant. The contract date is the trigger. Commercial property purchases are unaffected entirely.

The implication for litigation lawyers is straightforward. If you're considering an SMSF property loan, you're now working within a narrower set of options unless you already hold a residential property under an existing arrangement. For those exploring SMSF loans for lawyers for the first time, commercial property is the available pathway.

What Is a Limited Recourse Borrowing Arrangement

A Limited Recourse Borrowing Arrangement allows your Self-Managed Super Fund to borrow funds to acquire a single asset, typically property, while limiting the lender's recourse to that asset alone. The property is held in a bare trust until the loan is repaid, at which point legal title transfers to the SMSF trustee. The lender cannot pursue other fund assets if the loan defaults. This structure is governed by section 67A of the Superannuation Industry (Supervision) Act 1993.

Each LRBA covers one property in one bare trust. If your fund holds two properties acquired with borrowed funds, you need two separate LRBAs. The property must satisfy the sole purpose test, meaning it exists purely to generate retirement benefits for fund members. Personal use is prohibited. Rental income is taxed at 15% in accumulation phase, and capital gains are taxed at an effective 10% after applying the one-third discount.

Consider a litigation lawyer with $600,000 in their SMSF who identifies a commercial premises leased to a third-party tenant. The property is offered at $750,000. The fund contributes $150,000 as a deposit, and the SMSF applies for an SMSF commercial loan at 70% LVR. The lender approves the loan, the property is held in a bare trust, and rental income services the loan and contributes to the fund's cash reserve. The lawyer's fund now holds a diversified asset generating concessional income, with limited recourse protecting other fund holdings.

SMSF Loan LVR and Deposit Requirements

Non-bank and specialist lenders are currently offering LVRs up to 80% for commercial property, up from the historically conservative range of 60% to 70%. For commercial property specifically, LVRs typically range between 65% and 75% depending on asset class. Industrial property often attracts higher LVRs than retail, reflecting perceived risk and tenant stability.

Your SMSF deposit requirements depend on the LVR the lender approves. At 70% LVR, you need a 30% deposit plus settlement costs. At 75% LVR, the deposit drops to 25%. Lenders are also scrutinising post-settlement liquidity more than previously. Funds must demonstrate a cash buffer, often 5% to 10% of the asset value, to cover unforeseen expenses such as vacancy periods, urgent repairs, or rate increases. This means your fund needs more than just the deposit. You need sufficient cash reserves to satisfy the lender that the fund can service the loan and maintain compliance.

If your SMSF holds multiple income streams, illiquid assets, or pending contributions, you'll need to model cash flow carefully before committing to a purchase. Lenders will request fund financials, trust deeds, and trustee resolutions as part of the SMSF loan application process. The assessment is more involved than a standard investment loan, and timing matters.

Commercial Property LRBAs and Related-Party Leases

Commercial property LRBAs are unaffected by the 23 June 2026 ban. SMSFs can still borrow to purchase business real property, including premises used wholly and exclusively in a business. The property cannot be residential. It must be commercial in character and leased to a tenant operating a business.

SMSFs are restricted from holding more than 5% of their total assets in in-house assets, which includes loans to related parties or investments in them. Property leased to a related party falls into this category unless an exception applies. The in-house asset rules are strict. If your SMSF purchases commercial premises and leases them to your own law firm or a related entity, the lease arrangement must satisfy the business real property exemption. The property must be used wholly and exclusively in the business. If even part of the property is used for non-business purposes, the exemption is lost and the asset becomes an in-house asset, which triggers immediate compliance issues if it exceeds the 5% threshold.

Consider a litigation lawyer whose SMSF holds $800,000 in assets and wishes to purchase a $500,000 commercial office. If the property is leased to the lawyer's own litigation practice, it would ordinarily breach the in-house asset rules because $500,000 exceeds 5% of $800,000. However, if the property qualifies as business real property under section 71(1) and is used wholly and exclusively in the business, the exemption applies and the transaction is compliant. The distinction turns on use. If the property includes any residential component or non-business use, the exemption fails.

Safe Harbour Interest Rate and Related-Party LRBAs

For the 2025-26 financial year, the safe harbour interest rate for LRBAs used to acquire real property is 8.95%, down from 9.35% in 2024-25. 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 Practical Compliance Guideline PCG 2016/5. The interest rate charged must be no lower than the safe harbour rate, and loan terms must reflect commercial conditions.

If the loan is provided by a third-party lender such as a non-bank or specialist provider, the safe harbour rate is irrelevant. The lender sets the SMSF loan interest rate based on their own credit assessment and risk appetite. In our experience, SMSF variable rates from non-bank lenders typically sit above standard residential variable rates but below unsecured lending rates. SMSF fixed rates are also available, though terms are generally shorter than residential products.

When comparing SMSF lenders, you need to assess rate, LVR, loan term, repayment flexibility, and the lender's appetite for the specific asset class you're targeting. Not all lenders will finance all commercial property types. Some exclude certain postcodes, tenancy structures, or property configurations. An SMSF mortgage broker with access to multiple non-bank and specialist lenders can identify which lenders will consider your fund's circumstances and the property you're acquiring.

Trustee Training and Compliance 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 even fund disqualification. The training requirement is not optional. If your SMSF has an existing LRBA or is applying for a new one, trustees must complete the approved course.

SMSFs with borrowing arrangements face heightened data-matching and transaction-monitoring from the ATO. Trustees must ensure rigorous record-keeping, including loan agreements, bare trust deeds, trustee resolutions, property valuations, rental agreements, and cash flow statements. LRBA assets reached $75 billion by 2025, and the ATO has increased its scrutiny accordingly. The regulator is particularly focused on related-party transactions, non-arm's length income, and breaches of the sole purpose test.

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 such as adding a granny flat or converting a warehouse into mixed-use space are not. If you need to undertake major works, you must either repay the loan first or fund the works separately without altering the single acquirable asset.

Refinancing an Existing SMSF Property Loan

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. In practice, 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.

For residential LRBAs grandfathered under the 23 June 2026 ban, whether a refinance 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, as acting without clarity could inadvertently breach the new rules and put the fund's grandfathered status at risk. Commercial property LRBAs are unaffected by the ban, and refinancing of existing commercial LRBAs remains available under current rules.

If your SMSF holds a residential property purchased before the ban and you wish to refinance, the position is not yet certain. Until the ATO publishes further guidance, the safer approach is to retain the existing loan unless the financial benefit of refinancing clearly outweighs the compliance risk. If your fund holds a commercial property, refinancing is straightforward and follows the usual process.

Call one of our team or book an appointment at a time that works for you. We work with litigation lawyers who hold SMSFs and can assist with SMSF loan applications, lender comparison, and compliance structuring.

Frequently Asked Questions