Proven Tips to Buy Industrial Property with Your SMSF

An SMSF loan for industrial property gives you rental income taxed at 15 percent and a potential capital gain taxed at 10 percent if you hold for 12 months or more.

Industrial property held in your self-managed super fund remains one of the most reliable ways to build long-term wealth without the volatility of residential tenancies or the legislative restrictions that now apply to residential LRBAs. The rental yield from a warehouse or factory unit can support loan repayments while the asset appreciates, and if you lease to your own business, the transaction stays inside your super environment without creating an in-house asset problem. The challenge is structuring the loan correctly, satisfying the business real property test, and dealing with lenders who understand SMSF compliance.

Eastwood sits close to industrial precincts in Silverwater, North Ryde, and Macquarie Park, where demand for warehouse and light industrial space has remained consistent. For SMSF members in this area, industrial property offers a tangible alternative to listed securities and a way to diversify without exposure to the residential lending restrictions introduced in August.

What Changed with SMSF Borrowing in August

From 10 August, new LRBAs can only be used to acquire business real property. Residential property can no longer be purchased using borrowed funds in an SMSF, though you can still buy it outright or hold existing residential LRBAs without issue. The change does not affect commercial or industrial property that satisfies the business real property definition under section 66 of the SIS Act. If you exchanged a contract before 10 August, transitional provisions apply even if you settled after that date. Refinancing an existing residential LRBA is still permitted, but starting a new residential borrowing arrangement is not.

Industrial property purchased for genuine business use is unaffected. The property must be used wholly and exclusively in one or more businesses, and that use must be actual, not intended. A vacant warehouse does not qualify until it is leased and actively used for business purposes.

How the Business Real Property Test Works for Industrial Assets

A property qualifies as business real property when it is used wholly and exclusively in a business. The business does not need to be yours. If you lease a factory unit to an unrelated tenant who operates a manufacturing business from the premises, the property satisfies the test. If the tenant uses part of the building for storage and part as a residential flat, the property may fail the test or only partially qualify, depending on the structure and actual use.

Consider a member who purchased a 300-square-metre warehouse in Silverwater under an LRBA. The property was leased to a logistics company for storage and distribution. The tenant used the entire premises for business operations, with no residential component. The property satisfied the business real property definition at acquisition and throughout the tenancy. The member's SMSF received rental income taxed at 15 percent, and when the property was sold after five years, the capital gain was taxed at 10 percent after applying the one-third CGT discount available in accumulation phase.

The test is applied at the time of acquisition and continuously. If the use changes, the property may stop qualifying, which can trigger in-house asset issues or contravene the sole purpose test. A property marketed as commercial does not automatically pass the test. Actual use determines compliance, not zoning or marketing descriptions.

Deposit and LVR Requirements for Commercial SMSF Loans

Most lenders cap the loan-to-value ratio at 70 percent for commercial SMSF property loans, meaning you need at least a 30 percent deposit. Some lenders go to 75 percent in specific circumstances, but those deals are rare and usually involve established industrial assets in high-demand locations. The deposit must come from existing super balances, contributions within the relevant caps, or a combination. You cannot use personal savings or borrow the deposit from a related party.

Loan interest rates for SMSF commercial loans sit higher than standard residential variable rates. At current pricing, you are looking at variable rates in the range typically reserved for specialist or low-doc lending. Fixed rates are available but less common, and the terms are usually shorter than residential equivalents. The rate reflects the lender's limited recourse position and the smaller loan sizes involved.

Related Party Leasing Without Triggering In-House Asset Rules

If your business leases the industrial property from your SMSF, the arrangement is excluded from the in-house asset rules provided the property qualifies as business real property and the lease is on arm's length terms. Arm's length means market rent, a formal lease agreement, and no preferential treatment that benefits the business at the expense of the fund. The ATO expects rent reviews, documented terms, and evidence that comparable properties in the area lease for similar amounts.

In our experience, this is where most members either unlock significant value or create a compliance problem they did not see coming. A member operating a trade business might lease a factory unit from their SMSF, pay market rent monthly, and claim that rent as a business expense while the super fund receives income taxed at 15 percent. The transaction works because the property is business real property, the rent is at market rate, and the lease benefits the fund's retirement purpose. If the rent is artificially low or the lease terms favour the business, the arrangement may breach the sole purpose test or attract non-arm's length income treatment, which is taxed at 45 percent.

You cannot lease the property to your SMSF from your business, then have a family member live in part of the premises. That would fail the business real property test and likely breach related party rules. The use must remain wholly and exclusively business-related throughout the arrangement.

Structuring the LRBA and Holding Trust for an Industrial Purchase

The asset must be held in a separate bare trust, with your SMSF as the beneficiary. The SMSF trustee holds a beneficial interest in the property and acquires legal ownership once the loan is repaid. The holding trust cannot be a discretionary trust or a unit trust where the SMSF is one of several unit holders. The loan must be limited recourse, meaning the lender's rights in the event of default are restricted to the property itself, not other SMSF assets.

The borrowed funds must be used to acquire a single asset. You cannot buy two separate warehouse units on different titles under one LRBA, even if they are next door to each other and leased to the same tenant. Each title requires a separate loan arrangement. Stamp duty and loan establishment costs can be included in the borrowing, but you cannot draw down additional funds later to renovate or improve the property. Improvements must be funded from the SMSF's cash flow or additional contributions.

What Happens to CGT When the Property Is Held in Pension Phase

If your SMSF transitions to pension phase and the industrial property supports a retirement income stream, you may receive exempt current pension income on rental income and capital gains. Where the fund's assets are fully segregated as current pension assets throughout the income year, the capital gain is disregarded entirely. Where the fund uses the proportionate method because it holds both accumulation and pension interests, an actuarial certificate determines the exempt proportion.

A capital gain is not automatically tax-free just because a pension has started. The exemption depends on whether the asset was segregated, whether minimum pension payments were met, and whether the fund's methodology aligns with the ATO's requirements. LRBA liabilities are excluded when calculating the member's total superannuation balance, which affects access to contribution caps and determines exposure to Division 296 tax.

From 1 July, members with a total superannuation balance above $3 million at year-end face an additional 15 percent tax on earnings above that threshold, and a further 10 percent on balances above $10 million. Division 296 tax applies to realised earnings, not unrealised gains. Rental income and capital gains on sale form part of the earnings calculation, but an increase in property value without a sale does not trigger Division 296 tax by itself. Funds can elect to revalue CGT assets to market value as at 30 June to recognise accrued gains before the tax commenced.

Refinancing an Existing SMSF Commercial Loan

Refinancing a commercial LRBA is not affected by the August changes. You can move the loan to another lender, provided the refinanced arrangement relates to the same asset, maintains limited recourse, and meets arm's length terms. The ATO publishes safe harbour interest rates annually under PCG 2016/5, and refinancing outside those rates may attract scrutiny unless you can demonstrate the terms reflect commercial lending standards.

If you refinance and change the loan structure significantly, such as adding a new property or altering the beneficiaries, the ATO may consider the original arrangement to have ended and a new one to have begun. A new arrangement involving residential property entered into after 10 August would not be permitted under the current rules.

Offset accounts linked to the loan are allowed where they are genuine offset facilities offered by an authorised deposit-taking institution and do not create a charge over other fund assets. Most SMSF lenders do not offer offset accounts on commercial loans, but the option exists with some smaller institutions.

Using Contributions to Fund the Deposit or Loan Repayments

Concessional contributions are capped at $32,500 per member per year. Non-concessional contributions are capped at $130,000, with a bring-forward arrangement allowing up to $390,000 over three years if your total superannuation balance was below $1.84 million on 30 June of the prior year. Members with balances at or above $2.1 million cannot make non-concessional contributions.

Contributions can fund the deposit, cover loan repayments, or provide working capital for holding costs while the property is vacant. If rental income from the industrial property does not cover the loan repayment and outgoings, the shortfall must come from other fund income or additional contributions within the caps. Borrowing capacity for the SMSF loan is assessed on the fund's rental income, existing assets, and capacity to service the debt, not on the member's personal income.

Call one of our team or book an appointment at a time that works for you. We work with lenders who understand SMSF compliance and can structure the loan, the holding trust, and the settlement process without the delays that come from using a residential lending template for a commercial deal.

Frequently Asked Questions