SMSF Commercial Property Investing Pros and Cons
- Tuan D.
- Oct 17
- 6 min read
Updated: Nov 19
BY INVITED INDUSTRY EXPERT TUAN D. | Quantity Surveyors, Property Depreciation Experts & Property Valuers
Self-Managed Super Funds (SMSFs) give Australians greater control over how their retirement savings are invested. One increasingly popular strategy is using an SMSF to purchase commercial property or commercial real estate.
This allows trustees to hold tangible assets, earn rental income and benefit from long-term capital growth within the tax-advantaged environment of a superannuation fund.
However, investing in commercial property through an SMSF is not as simple as buying a shopfront or warehouse. It involves very strict rules and compliance set by the Australian Taxation Office (ATO) and requires a sound understanding of borrowing structures, risks, loan repayments, property expenses, and returns.
This guide explains the benefits, rules, and steps involved in SMSF commercial property investment.
Why Invest in Commercial Property Through an SMSF?
Investing in commercial property through an SMSF offers a range of financial and strategic benefits.
One of the main advantages is the potential for lower tax rates. Rental income earned within an SMSF is generally taxed at 15 per cent, while capital gains may be taxed at only 10 per cent if the asset is held for more than twelve months. In retirement, both income and gains can become tax-free once the fund enters the pension phase, satisfying the sole purpose test for retirement benefits.
Another key advantage is control. Trustees can choose the exact property and manage the asset directly, rather than relying on external fund managers. For small business owners, the fund can also purchase their business premises or commercial premises, allowing them to lease it back at market rates. This creates both stability for the business and steady income for the SMSF. Combined, these factors make commercial property an attractive long-term option for many SMSF members and investors.
Rules and Regulations You Must Know
Investing in commercial property through an SMSF is tightly regulated by the Australian Taxation Office (ATO) and the Superannuation Industry (Supervision) Act 1993. Trustees must follow very strict rules to ensure the investment benefits members’ retirement savings and not personal interests.
The property must qualify as business real property, which means it is used wholly and exclusively for business purposes. If the property is leased to a related party, such as a business owned by a fund member, the lease must be at market rent and on arm’s length terms.
Borrowing to buy commercial property is only permitted through a Limited Recourse Borrowing Arrangement (LRBA), where the lender’s recourse is limited to the property being purchased. This structure protects other SMSF assets in the super balance from potential losses.
Trustees must also ensure the fund remains diversified and has sufficient funds and liquidity to meet ongoing obligations including loan repayments and property expenses. Failing to comply with these rules can result in penalties, disqualification, or the fund losing its concessional tax status due to non-compliance.
Ways to Acquire Commercial Property in Your SMSF
There are several ways an SMSF can acquire commercial property, depending on the fund’s financial position and investment goals. The simplest approach is a direct cash purchase, where the fund uses its own money or superannuation contributions to buy the property outright at market value. This avoids debt risk and reduces ongoing legal fees and administration costs.
Another option is borrowing through a Limited Recourse Borrowing Arrangement (LRBA). Under this structure, a separate bare trust holds the property on behalf of the SMSF until the loan is repaid. This allows the fund to leverage its assets while keeping other investments protected.
Trustees can also use an in-specie transfer, where an existing business property owned by a member is transferred into the SMSF. Alternatively, an SMSF unit trust or tenants-in-common arrangement allows joint ownership with other investors or funds. Each structure has its own tax and compliance implications, so professional advice is essential before proceeding.
The Pros and Cons of SMSF Commercial Property Investment
Like any investment, buying commercial property through an SMSF has both advantages and disadvantages.
Pros:
Tax efficiency: Income and capital gains are taxed at concessional rates within the SMSF, and may become tax-free once the fund moves into the pension phase.
Control: Trustees can select the property, negotiate leases, and make decisions that align with their investment strategy.
Business benefits: Owning your business premises through an SMSF can provide security and allow rent payments to flow back into your retirement savings.
Diversification: Investing in commercial property can diversify SMSF investments beyond residential property and traditional assets like shares and managed funds.
Cons:
Complexity and higher costs: SMSFs must meet strict regulatory standards, and property transactions often involve higher legal fees and administrative costs.
Liquidity risk: Property is an illiquid asset and can be difficult to sell quickly if funds are needed.
Concentration risk: Large property holdings may limit diversification within the fund.
A careful assessment of these factors is crucial before making an investment decision.
Tax and Borrowing Considerations
Commercial property held within an SMSF enjoys favourable tax treatment. Rental income is generally taxed at 15 per cent, and if the property is owned for more than twelve months, any capital gain may receive a one-third discount, reducing the effective tax rate to 10 per cent. Once the fund enters the pension phase, income and capital gains from the property can become entirely tax-free.
When borrowing through a Limited Recourse Borrowing Arrangement (LRBA), interest payments and associated costs are typically deductible within the fund. However, borrowing limits and lender requirements can vary, and additional setup costs apply, contributing to higher costs.
It is vital to ensure that all borrowing and repayment arrangements remain compliant with ATO guidelines. Professional financial advice can help structure loans correctly and maintain long-term tax efficiency.
Is SMSF Commercial Property Right for You?
Commercial property investment can be rewarding, but it is not suitable for every SMSF. Trustees should consider their fund balance, cash flow, and ability to manage compliance obligations before proceeding. Generally, a super balance of at least $300,000 is recommended to ensure the investment is cost-effective and diversified.
You should also assess your comfort with managing property assets and maintaining liquidity for expenses, contributions, and pension payments. SMSF trustees who already operate a business may find this strategy particularly beneficial, as leasing the property back at market rate rent can strengthen both their business and retirement outcomes.
Before making any commitment, seek advice from an SMSF accountant, financial adviser, or property specialist to confirm the strategy fits your long-term goals and complies with the trust deed and all legal requirements.
Build a Stronger Retirement Strategy With SMSF Commercial Property Investments
SMSF commercial property investment can provide long-term stability, tax benefits, and greater control over retirement savings. However, it also carries strict compliance requirements and financial risks that demand careful planning. Trustees should weigh the advantages and limitations before proceeding.
To make informed decisions, speak with a qualified SMSF property valuation specialist who can guide you through all the different options and help structure your investment correctly from the start.
For further details or to explore how our team can assist you, please contact SMSF Intelligence for an introduction.
ABOUT THE AUTHOR:
Tuan D. serves as the Principal of a multi-award-winning practice, leading a team of Quantity Surveyors, Property Depreciation Experts and Property Valuers. His firm is rated 5-stars by CANSTAR and 2023 winner of the CLIENTCHOICE AWARDS. Ready to connect with the right expert?
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DISCLAIMER: The views and opinions expressed in this article are those of the guest expert and do not necessarily reflect the views of the SMSF Intelligence team, its owners, or its representatives and partners. No guarantee is given as to the accuracy, completeness, or timeliness of the content, and we do not accept any liability for loss or damage arising from reliance on the information contained in this article or any linked materials. This article is published for general information and educational purposes only and should not be considered financial, legal, tax, or investment advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before making any decisions based on this content, you should consider its appropriateness in light of your circumstances and seek advice from a qualified professional. We do not provide financial, taxation, or legal advice. Hashtags: #SMSF #CommercialProperty #SuperannuationAustralia #SMSFInvestment #SMSFExperts
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