The Easiest Way to Structure SMSF Loan Serviceability

When you borrow through your SMSF, the lender does not look at your personal income or employment. Serviceability is calculated using the contributions flowing into the fund and the rental income the property will generate, minus expected operating costs and loan repayments.

That assessment works differently depending on whether you are buying commercial property or refinancing an existing residential loan protected under the transitional provisions. The approach is practical but specific, and understanding it before you make an offer can save you months of adjustment.

How Lenders Assess Contributions and Rental Income

A lender starts by identifying the fund's annual concessional and non-concessional contributions over the past two to three years. Concessional contributions include employer contributions, salary sacrifice, and personal deductible contributions, capped at $32,500 per member per year from 1 July 2026. Non-concessional contributions have a cap of $130,000 per member per year.

Lenders typically accept contributions that have been consistent and are likely to continue. A member approaching retirement or already in pension phase may not be able to demonstrate ongoing contribution capacity. Some lenders will accept a statutory declaration confirming the member's intention to continue contributing at a stated level. Others require evidence of the member's employment income or business profit to support that intention, even though the SMSF itself is the borrower.

Rental income is assessed at 80 percent of the projected market rent. That deduction accounts for vacancy, maintenance, and other costs. The rental appraisal must come from a licensed valuer or real estate agent familiar with the suburb. An appraisal for a commercial property in the Marsden Park industrial precinct should reflect current leasing activity in that area, not a generalised estimate.

Consider a fund with two members contributing a combined $40,000 annually in concessional contributions and acquiring a small warehouse near Hollinsworth Road. The property is valued at $750,000, rental income is appraised at $50,000 per annum, and the loan amount is $525,000 at 80 percent LVR. The lender applies 80 percent of the rental income, giving a usable figure of $40,000. Add the $40,000 in contributions, and the fund has $80,000 available annually. After deducting loan interest, principal repayments, fund administration costs, and a buffer, the lender determines whether the arrangement is sustainable. If the numbers fall short, the member may need to increase contributions or reduce the loan amount.

Why Commercial Property Is Now the Only Borrowing Option for New Acquisitions

From approximately 10 August 2026, new limited recourse borrowing arrangements can only be used to acquire business real property as defined under section 66 of the SIS Act. Residential property does not satisfy that definition. The change does not prevent SMSFs from owning residential property outright or holding residential property acquired under an LRBA entered into before the commencement date. It does prevent new borrowing to acquire residential property.

Business real property means land and buildings used wholly and exclusively in one or more businesses. The use must be actual, not intended or described. A property marketed as commercial does not automatically qualify. A warehouse leased to a logistics company meets the definition. A mixed-use property with a residential component may not, depending on how the residential portion is used and whether it can be separated.

Marsden Park has an established industrial area along Hollinsworth Road and Northbourne Drive, and a growing residential precinct further south. A fund acquiring a commercial property in the industrial area can still use an SMSF loan under the post-commencement rules. A fund acquiring a residential property after the commencement date cannot borrow, even if the property is intended for investment.

Refinancing an Existing Residential LRBA After the Legislative Change

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 protects existing residential LRBAs from the new restriction, provided the arrangement was entered into before the commencement date. That protection extends to maintaining or refinancing the borrowing under the same arrangement.

As at 22 July 2026, the ATO had not published updated guidance on what constitutes maintaining or refinancing an existing arrangement versus entering into a new one. Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. A new arrangement entered into after the commencement date would be subject to the post-commencement rules and could not involve residential property.

Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, such as increasing the loan amount beyond what is required to discharge the original loan and cover associated costs, or borrowing to acquire an asset not contemplated under the original arrangement. Switching lenders to secure a lower interest rate, by itself, has not historically been treated as entering into a new arrangement, provided the terms remain consistent with the original LRBA.

A fund holding a residential property in Marsden Park under an LRBA entered into before the commencement date should be able to refinance to a different lender if the loan amount, security, and structure remain materially the same. Any increase in the loan amount should be limited to costs directly associated with the refinancing, such as discharge fees, valuation fees, and legal costs. The fund's legal adviser should confirm that the refinancing structure preserves the original arrangement before settlement.

What the Single Asset Rule Means for Mixed-Use and Multi-Title Properties

Borrowed funds under an LRBA 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 unless they are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together.

A commercial property on a single title with a small office and a larger warehouse on the same parcel can be treated as a single asset, provided the whole property is used wholly and exclusively in business. A property on two separate titles, even if adjacent and operated as a single commercial premises, does not satisfy the single asset requirement.

Mixed-use properties require careful assessment based on actual use. A property with a residential flat above a retail shopfront may not qualify as business real property, even if the flat is used as a manager's residence in connection with the business. A concession exists for certain primary production property, under which a dwelling occupying no more than 2 hectares does not cause the property to fail the wholly and exclusively test, provided the main use of the whole property is not domestic or private. That concession is specific to primary production and does not apply to urban or industrial mixed-use properties.

A buyer considering a small commercial unit in Marsden Park should confirm the property is on a single title and used wholly for business purposes before making an offer. If the property includes a residence or is on multiple titles, the fund may not be able to use borrowed funds to acquire it, even if the overall use is predominantly commercial.

How Arm's Length Terms and Safe Harbour Rates Affect Your Loan Structure

Practical Compliance Guideline PCG 2016/5 sets out arm's length terms for SMSF LRBAs, including safe harbour interest rates updated annually by the ATO. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent, rather than the concessional rate of 15 percent.

The safe harbour rates apply to both real property and listed securities and are intended to reflect terms that would apply between unrelated parties dealing at arm's length. A loan from a related party at an interest rate significantly below the safe harbour rate may attract scrutiny. A loan from an unrelated lender at a commercial rate that falls within the safe harbour range is unlikely to be challenged.

The limited recourse character of the loan must be maintained. In the event of a default, the lender's recourse must be limited to the asset being acquired under the arrangement and not extend to other assets of the SMSF. A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement.

A fund borrowing from a related party to acquire a commercial property should document the loan in writing, charge interest at a rate within the safe harbour range or supported by independent evidence, and ensure the loan agreement expressly limits recourse to the property held in the holding trust. Any deviation from arm's length terms should be reviewed by a qualified SMSF adviser before settlement.

Division 296 Tax and How It Applies to Rental Income and Capital Gains

From 1 July 2026, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount by which a member's total superannuation balance exceeds $3 million at the end of the financial year. An additional 10 percent Division 296 tax applies to earnings above $10 million. Both thresholds are subject to indexation in subsequent years.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. Rental income and realised capital gains may contribute to the Division 296 calculation. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. A fund with a $1 million balance and a $500,000 loan to acquire a commercial property has a total superannuation balance of $1 million, not $1.5 million. The property's market value and the loan balance do not affect the calculation, only the net value attributed to the member.

A capital gain is realised through a CGT event, typically the sale or disposal of the property. A complying SMSF is taxed at 15 percent on its assessable income, including net capital gains. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual liability varies depending on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position.

A capital gain is not automatically exempt because an SMSF has commenced a pension. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income. Where a fund's assets are fully segregated as current pension assets, a capital gain on disposal of those assets is disregarded. Where the fund uses the proportionate method, the exemption applies to only the exempt proportion of the net capital gain, as determined by an actuarial certificate.

An SMSF may elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June 2026. This election recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. The election applies only for the purpose of working out Division 296 fund earnings. Division 296 tax assessments for the 2026-27 income year are expected to begin issuing in the second half of the 2027-28 income year.

Rental income from a commercial property held in an SMSF is assessable income in the year it is received. Where the member's total superannuation balance exceeds the relevant threshold, a portion of that rental income may be subject to Division 296 tax in addition to the fund's ordinary income tax. The fund's tax adviser should model the impact of Division 296 tax on projected rental income and capital gains before the fund commits to a purchase.

The legislative framework around SMSF borrowing has tightened significantly, but the opportunity to acquire commercial property through your fund remains open. Serviceability is assessed using contributions and rental income, both of which need to be consistent and well documented. The numbers need to work before you make an offer, and the property needs to satisfy the business real property definition. If you are refinancing an existing residential LRBA, the structure and terms need to preserve the original arrangement.

Call one of our team or book an appointment at a time that works for you. We work with SMSF loans regularly and can help you understand how the lender will assess your fund's borrowing capacity, whether the property you are considering qualifies under the current rules, and what documentation you will need to support the application.

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