SMSF Loans & How to Buy Industrial Property

Can You Still Borrow Through Your SMSF to Buy Industrial Property?

You can borrow through your SMSF to purchase industrial property using a limited recourse borrowing arrangement, and the recent restrictions on residential property LRBAs do not apply to business real property. From 10 August 2026, LRBAs entered into to purchase real property can only be used to acquire business real property, but this restriction does not prohibit commercial and industrial property acquisitions. The industrial property must satisfy the business real property definition under the SIS Act, which requires the land and buildings to be used wholly and exclusively in one or more businesses.

Kellyville sits within a corridor that has experienced significant commercial and light industrial development over the past decade, particularly along Memorial Avenue and closer to the M7 motorway. For members considering industrial property as an SMSF investment, understanding how lenders assess these transactions and how the property's actual use determines compliance is the foundation of a workable structure.

What Qualifies as Business Real Property for an SMSF Loan

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the SMSF or the fund member. Whether a property qualifies depends on its actual use at the time of acquisition, not its zoning or how it is marketed. An industrial property marketed as commercial does not automatically satisfy the definition if it is not being used wholly and exclusively in a business at the point of purchase.

Consider a member purchasing a small warehouse in the commercial precinct near Kellyville Metro. The property is tenanted by a logistics company using the entire space for inventory storage and dispatch operations. The property qualifies as business real property because its use is wholly and exclusively for the tenant's business. If the same property included a residential caretaker's unit occupying part of the building, the mixed-use nature may prevent it from meeting the wholly and exclusively test, depending on the proportion and nature of that use.

How Lenders Assess Industrial Property Under an SMSF LRBA

Lenders treating industrial property differently to residential or office property when assessing an SMSF loan. Loan-to-value ratios for industrial assets typically sit between 60 and 70 percent, with some lenders capping exposure at 65 percent regardless of the fund's overall financial position. The asset is held in a separate holding trust, the SMSF acquires a beneficial interest in the asset, and obtains legal ownership after the loan is repaid. Deposit requirements are therefore higher than for residential property, and serviceability is assessed almost entirely on the rental income the property generates.

Lenders will require a current lease with a creditworthy tenant, and many will not proceed if the lease term remaining is less than three years. They will also assess the building's condition, age, and any specialised fit-out that may limit future tenant appeal. A property with heavy customisation for a specific trade or industry may be viewed as higher risk if the tenant vacates. Interest rates on industrial LRBAs range from around 6.5 to 8 percent depending on the lender, the LVR, and whether the loan is fixed or variable.

Limited Recourse Borrowing and the Single Asset Rule

The borrowed money must be used to acquire a single asset, or a collection of identical assets with the same market value that can be treated as a single asset. Multiple real property titles cannot be acquired under a single LRBA. If you are looking at an industrial property on two separate titles, even if they are sold together and used as one operational site, they do not qualify under a single LRBA unless they meet the narrow exception for assets that are distinctly identifiable as a single asset with equal market value.

Expenses such as loan establishment costs and stamp duty may also be covered by the borrowed funds, but borrowed funds cannot be used to improve an existing asset. This restriction creates complications for older industrial properties that may require capital works shortly after purchase. If the property needs a new roof, updated electrical systems, or subdivision of internal space, those costs cannot be funded through the LRBA and must be paid from the SMSF's existing cash reserves or member contributions, subject to contribution caps.

Rental Income, Tax Treatment, and Division 296 Considerations

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Rental income from an industrial property held in accumulation phase is taxed at 15 percent. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's cost base, acquisition and selling costs, capital improvements, and the fund's overall position for that year.

For members with total superannuation balances approaching or exceeding the large super balance threshold of $3 million, Division 296 tax of 15 percent applies from 1 July 2026 to the proportion of earnings attributable to the amount above the threshold, and where the balance exceeds $10 million, an additional 10 percent Division 296 tax applies to the proportion above that threshold. Rental income and realised capital gains contribute to the Division 296 calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes, meaning the outstanding loan does not reduce the balance for this assessment.

Related Party Leasing and Arm's Length Requirements

One advantage of industrial property in an SMSF is the ability to lease it to a related party business without contravening in-house asset rules, provided the property qualifies as business real property. Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules, but any such lease must be made on arm's length terms at market value.

In a scenario where a member operates a manufacturing business through a company structure, the SMSF can purchase an industrial property and lease it to that company. The lease must reflect market rent, include terms consistent with commercial leases in the area, and be documented properly. Rent below market value may trigger non-arm's length income provisions, resulting in income being taxed at 45 percent rather than the concessional 15 percent rate. A formal lease agreement and periodic rent reviews supported by independent valuations are necessary to maintain compliance.

Refinancing an Existing SMSF Industrial Property Loan

The ATO considers refinancing an LRBA to mean entering into a new loan contract for the same asset, with the same or a new lender. You can refinance an existing SMSF loan for industrial property to a different lender or negotiate revised terms with the current lender without the arrangement being treated as a new LRBA, provided the refinanced loan relates to the same single asset and maintains the limited recourse character of the original arrangement.

The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5, updated annually, applying to both real property and listed securities. If your SMSF loan involves a related party lender, the interest rate charged must meet the safe harbour rate or be otherwise demonstrably at arm's length. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate of 45 percent.

Structuring the Holding Trust and Ensuring Compliance

While superannuation law does not specify the type of trust that must be used as a holding trust, the SMSF trustee must have a beneficial interest in the asset being held in the holding trust and the right to acquire legal ownership of the asset after making one or more payments. A bare trust is the most commonly used structure. The trustee of the bare trust holds legal title to the industrial property, and the SMSF trustee holds the beneficial interest. Once the loan is repaid, legal title transfers to the SMSF.

The holding trust cannot be a discretionary trust, and the SMSF trustee cannot be one of a number of unit holders in a unit trust. The trust deed for the holding trust must clearly identify the SMSF as the beneficiary and set out the conditions under which legal ownership will transfer. The deed must also limit the lender's recourse to the asset held in the trust in the event of default, ensuring no other SMSF assets are at risk.

All SMSF investments, including industrial property held under an LRBA, must satisfy the sole purpose test under section 62 of the SIS Act at all times. The property must be maintained solely to provide retirement benefits to members. Any decision that provides a present-day benefit to a member or related party, such as below-market rent or personal use of part of the property, may contravene this requirement and result in the fund losing its complying status.

Acquiring industrial property through your SMSF involves detailed compliance work, lender negotiation, and ongoing administration. The structure can deliver long-term benefits when set up correctly, but the rules are specific and the consequences of non-compliance are significant. Call one of our team or book an appointment at a time that works for you to discuss your circumstances and the steps involved in structuring an SMSF loan for industrial property.

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