SMSF Property Rules for Business Real Property

Buying a commercial property using your SMSF can be complicated. You need to abide by SMSF property rules according to the Australian Tax Office (ATO) while also meeting the limited borrowing recourse arrangement (LRBA) requirements, if you choose to use an SMSF commercial loan. 

This may seem daunting at first, but once you understand the rules and regulations, you can start your SMSF commercial property purchase with more confidence. 

What kind of commercial property can you buy with an SMSF? 

The commercial property you buy must be a business real property. Business real property generally refers to an eligible interest in real property that is used wholly and exclusively in one or more businesses.

According to the Self Managed Superannuation Funds Ruling SMSFR 2009/1, a property may still qualify as business real property even if it contains a dwelling used for private or domestic purposes, provided specific conditions are met, such as:

• Any dwelling used for private or domestic purposes is on an area of land no more than two hectares. 
• The main use of the whole property is not for domestic or private purposes. 

Business real property may include office spaces, storefronts, warehouses, manufacturing factories, medical suites, and farmland. The business real property criteria will need to be met before you can consider using your SMSF to purchase the property. 

Can you sell a member-owned commercial property to the SMSF? 

If you own a commercial property and have met the business real property test, the ATO also requires that the property is sold at market value and the transaction is done at arm’s length terms. Provided your SMSF is compliant with the superannuation laws, you may also be able to transfer the property to your SMSF as a contribution to the fund.  

Does a small private area break the business real property test? 

To be owned by an SMSF, a commercial property must pass the business use test. The property must wholly and exclusively be used in one or more businesses to be considered a business real property. However, there are exceptions to this rule.  

According to the ATO SMSFR 2009/1 guideline, “a minor, insignificant or trifling non-business use of the property can also be accommodated under the 'wholly and exclusively' threshold.” 

Farmland also has a notable exception for personal and residential dwellings not exceeding two hectares and that private use is not the predominant purpose of the farm. 

SMSF borrowing for commercial property 

SMSFs are strictly prohibited from borrowing money unless it is under an LRBA where the acquisition of the commercial property complies with SMSF laws and regulations. You may want to consult a legal professional to help you set up the necessary trust documents to establish the LRBA. Since SMSF loans are LRBAs, you need to establish a separate bare trust and corporate trustees to hold the legal title of the commercial property as you pay off the loan. 

There’s a lot you need to know when using an SMSF loan to buy a commercial property. If you’d like to learn more about the process and what your options are, you can get in touch with the friendly lending specialists at loans.com.au. You can also check out our range of SMSF commercial loans to see which one suits your needs best.  

Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.