SMSF Commercial Loans: What Not to Avoid When Buying

Buying your practice premises through your SMSF can build wealth inside a concessionally taxed structure while locking in occupancy for the long term.

The mechanics involve a limited recourse borrowing arrangement where your fund borrows to acquire business real property, holds it in a bare trust until the loan is repaid, then leases it back to your practice entity. The rental income flows into your fund at a maximum tax rate of 15 percent during accumulation phase, and capital gains attract a discounted rate of 10 percent if the property is held for more than 12 months. For orthodontists with established practices and sufficient superannuation balances, this structure converts what would otherwise be after-tax rent payments into concessionally taxed retirement savings.

Business Real Property Under the SIS Act

Your property must be used wholly and exclusively in one or more businesses to qualify as business real property under section 66 of the SIS Act. A consulting suite in a mixed-use building with retail tenancies and residential apartments qualifies if your suite itself is used entirely for your orthodontic practice. A property marketed as commercial does not automatically meet the definition. The ATO assesses actual use at the time of acquisition, not zoning or intended use. If you purchase a vacant shell with the intention of fitting it out for your practice, the property must be capable of immediate business use when the SMSF acquires it, even if fit-out occurs afterwards. Properties with a residential component attached may fail the test entirely or only partially qualify, depending on whether that component can be separated and valued independently.

Consider an orthodontist purchasing a ground floor tenancy in a suburban medical precinct. The tenancy has been used as a dental practice for the previous occupant, includes plumbing for sterilisation areas, and has no residential features. That property satisfies the definition from the date of settlement. If the same orthodontist purchases a building with a practice on the ground floor and a two-bedroom apartment on the first floor, the mixed use means the whole building may not qualify unless the residential portion can be carved out and valued separately, which introduces valuation complexity and may not be accepted by all lenders.

Setting Up the Limited Recourse Borrowing Arrangement

The SMSF does not hold legal title during the loan term. Legal title sits with a bare trustee, typically a corporate trustee entity established solely for this purpose, while your SMSF holds the beneficial interest and makes all decisions regarding the property. The loan is limited recourse, meaning if your fund defaults, the lender's claim is restricted to the property held in the trust and cannot reach other SMSF assets. That protection comes with higher pricing. Most lenders offering SMSF commercial loans require loan-to-value ratios no higher than 70 percent, with some capping at 60 percent depending on property type and location.

Your fund pays the deposit, all acquisition costs including stamp duty and legal fees, and services the loan from contributions and rental income. Borrowed funds cannot be used to improve the property after settlement. If you plan a fit-out or renovation, those costs must come from existing fund cash or future contributions, not from drawdowns on the loan. That restriction applies to all LRBAs entered into after 7 July 2010.

Leasing Back to Your Practice Entity

Once the property settles, your SMSF leases it to the entity that operates your practice, typically a company or unit trust. The lease must be documented, at market rent, and on arm's length terms. Business real property leased between the fund and a related party is excluded from the in-house asset rules, but the exemption only applies if the lease is genuinely commercial. An undermarket lease exposes the fund to compliance risk and may contravene the sole purpose test if it provides a present-day benefit to you or your practice entity at the expense of the fund's retirement purpose.

Market rent is determined by a registered valuer with commercial leasing experience in your area. For an orthodontic practice in a high-street location, market rent might differ significantly from a practice in a medical precinct with shared reception and waiting areas. The valuer considers location, fit-out quality, parking, and comparable transactions. Your fund's trustees, which in most cases include you, cannot simply set the rent based on what feels reasonable. The lease should be reviewed every two to three years to ensure the rent remains at market, particularly if surrounding rental growth has been strong.

In our experience, many orthodontists underestimate the documentation required to satisfy both the ATO and the lender. The lease, the bare trust deed, the loan agreement, and the SMSF trust deed must all align. Any inconsistency between these documents can delay settlement or, in a review scenario, create compliance exposure.

Comparing SMSF Commercial Lenders

Not all lenders offer SMSF commercial loans, and those that do apply different criteria for property type, location, and borrower experience. Some lenders will only consider properties in metropolitan areas or regional centres above a certain population threshold. Others exclude specific property types such as service stations, pubs, or properties with environmental risk. Loan-to-value ratios typically range from 60 to 70 percent, though some specialist lenders will go higher if the property is in a prime location and the fund has a strong contribution history.

Rental income from the lease can be included in serviceability, but lenders apply different treatment. Some lenders will include 80 percent of the lease income, others will include 100 percent if the lease is to a related party with demonstrated income to support the rent. Contributions to the fund may or may not be included depending on whether they are employer contributions with a history or voluntary contributions that could cease at any time. If you are a director of the practice entity and that entity pays the rent, some lenders treat that rent as reducing your personal income because the company's profit available for distribution is reduced by the lease payment.

Fixed and variable rate options are available. A fixed rate provides certainty over repayment costs and makes budgeting easier for the fund, particularly if rental income is the primary source of loan servicing. Variable rate loans offer offset account options in some cases, allowing the fund to park surplus cash and reduce interest costs. Rates for SMSF commercial loans sit above standard commercial property investment loans due to the limited recourse structure and the additional legal complexity.

Sole Purpose and Compliance Considerations

Every decision regarding the property must be made for the sole purpose of providing retirement benefits. Installing a fit-out that suits your specific practice needs is acceptable if it enhances the property's value or rental appeal to future tenants in the same field. Installing highly personalised features with no resale value or tenant appeal may be questioned in a review, particularly if the fund paid for those improvements. Similarly, paying above-market rent to increase the fund's income might seem beneficial, but it creates a present-day cost to your practice entity that may not align with commercial behaviour and could be challenged.

The ATO published updated guidance on LRBAs during the first half of this year. Business real property that satisfies the definition under section 66 of the SIS Act is not affected by the recent changes to LRBA rules that commenced on 10 August. Those changes primarily impact residential property acquisitions. However, trustees should seek advice from a licensed SMSF specialist before proceeding, as the ATO was still updating certain guidance pages as at 10 August.

SMSF Commercial Loan Application Process

The application process differs from a standard commercial loan. The lender assesses the fund's ability to service the loan, the trustees' experience managing the fund, the property's suitability, and the strength of the lease. You will need the fund's financial statements for the past two years, the trust deed, a copy of the proposed lease, a valuation of the property, and evidence of the fund's cash position to cover the deposit and costs. If the fund is newly established or has a limited balance, some lenders will not proceed regardless of your personal financial position, because the loan is to the fund, not to you personally.

Lenders also assess whether the property can be sold to an unrelated third party if the fund defaults. A highly specialised property with limited alternative use may not be acceptable security even if it suits your practice perfectly. A consulting suite in a mixed-use medical building with standard fit-out and good access is more appealing to a lender than a standalone building in a residential area with a fit-out specific to orthodontics.

Processing times are longer than residential or standard commercial loans due to the additional legal review and the need to establish the bare trust structure. Settlement typically occurs 60 to 90 days after a formal application is lodged, assuming the property, lease, and fund documentation are all in order from the start. If you are purchasing off-market from a related party, additional valuation steps and ATO reporting obligations apply, which can extend the timeline further.

Call one of our team or book an appointment at a time that works for you. We work with orthodontists structuring SMSF acquisitions and can help you compare lenders, coordinate the legal setup, and make sure the lease and loan structure align with both your practice needs and your fund's compliance obligations.

Frequently Asked Questions