Commercial vs Residential Property in SMSF After the 2026 LRBA Ban

The Key Difference

The 2026 LRBA ban applies to residential property only. Commercial property LRBAs — including industrial, retail, and office premises — are confirmed unaffected. This creates a clear distinction in how property investment inside super will work going forward.

Residential Property in SMSF

New residential property LRBAs will be banned from mid-August 2026. Existing arrangements are grandfathered. Without an LRBA, your SMSF can still purchase residential property outright using accumulated savings, but borrowing is no longer an option. This means residential property purchases will require more capital upfront, potentially limiting this strategy to larger SMSF balances or co-investment structures like tenants in common or fixed unit trusts.

Commercial Property in SMSF

Commercial property LRBAs remain fully available. This is significant for business owners who want their SMSF to own the premises their business operates from. The structure allows the SMSF to borrow to purchase commercial property, lease it back to the business at market rates, and benefit from the concessional tax treatment within super. Given the residential ban, commercial property via LRBA has become a relatively more attractive option.

What Your SOA Should Show

If your adviser has recommended either residential or commercial property inside your SMSF, your SOA should clearly explain: the type of property and whether borrowing is involved; the structure used (LRBA, direct purchase, unit trust, etc.); the tax implications and how they affect your retirement outcome; the risks specific to that property type; and whether alternatives were considered. If these details are missing, ask for clarification or get an independent check.

Commercial vs Residential Property in SMSFs Post-Ban

Before the LRBA ban, SMSFs commonly invested in both commercial and residential property using borrowed funds. The ban has shifted the landscape significantly: without leverage, the primary consideration becomes which type of property offers the best return on the full purchase price (rather than on a smaller equity contribution).

Commercial property often offers higher rental yields typically 6-10% compared to residential yields of 2-4% in most Australian markets. This makes commercial property potentially more attractive for SMSFs that are funding purchases from accumulated capital. However, commercial property also carries higher vacancy risk, longer lease-up periods, and potentially higher maintenance costs. Residential property benefits from more stable demand and lower vacancy risk but generally offers lower rental returns and higher transaction costs.

Business Real Property in SMSFs

One area where the LRBA ban has less impact is business real property — commercial premises used by a business connected to the SMSF member. Many small business owners hold their business premises in their SMSF and lease them back to their business. This strategy remains viable without LRBAs, provided the lease is on arm's length commercial terms.

The key advantage of holding business real property in an SMSF is that rental payments from the business are tax-deductible to the business while the rental income in the SMSF is taxed at only 15% (or 0% in pension phase). The property is also protected from business creditors and can be sold to fund retirement. However, the purchase must comply with super law in-house asset rules, and the property must genuinely be used for business purposes.

Funding Property Purchases Without Borrowing

For SMSFs looking to acquire property without LRBAs, the funding strategy requires careful planning. Contributions should be maximised using available caps: concessional contributions of $30,000 ($32,500 from July 2026), non-concessional contributions of $120,000 ($130,000), and downsizer contributions of up to $300,000 per person. For a couple approaching retirement, downsizer contributions alone could add $600,000 to super, which could fund a modest commercial property.

Timing is also important. Consider coordinating property purchases with the sale of other investments or with the receipt of insurance proceeds or inheritance. Avoid selling growth assets at an inopportune time simply to fund a property purchase. A well-diversified SMSF should maintain sufficient liquidity without being forced to sell assets at unfavourable prices.

Frequently Asked Questions

Can my SMSF still buy commercial property after the ban?
Yes, your SMSF can still buy commercial property, but the purchase must be funded from the SMSF's existing cash reserves or member contributions, not through borrowing. This means you need to plan well in advance to accumulate sufficient funds.

Is commercial property in an SMSF still tax-effective?
Yes. Rental income from commercial property in an SMSF is taxed at 15% during accumulation phase and 0% in pension phase. Capital gains on properties held for more than 12 months receive a one-third discount for SMSFs (compared to the 50% discount for individuals). The property is also generally exempt from land tax surcharges that apply to residential property in some states.

What happens to my existing LRBA for commercial property?
Existing LRBAs for commercial property entered before 9 May 2023 are grandfathered and can continue. However, you cannot increase the borrowing or refinance under the old LRBA structure. The existing loan must run its course.

Can I use a related trust to hold property for my SMSF?
Yes, using a related unit trust or fixed trust to hold property can be an alternative structure. The SMSF can invest in the trust, which in turn holds the property. However, this must comply with the in-house asset rules (generally limited to 5% of the fund's assets). Proper legal advice is essential.