Avoid these 4 mistakes with SMSF unit purchases

If you're looking at using your SMSF to buy a unit, the rules changed in August. From 10 August 2026, new Limited Recourse Borrowing Arrangements can only be used to acquire business real property, not residential units.

That doesn't mean you can't own a residential unit in your fund. You can still buy one outright with existing super savings, and if you had a binding contract in place before the restriction came into effect, you're protected under the transitional provisions. But if you're planning to borrow now to purchase a unit, it needs to qualify as business real property under section 66 of the SIS Act, which typically means commercial premises leased to a business.

Mistake 1: Assuming a commercial unit automatically qualifies

Business real property means land and buildings used wholly and exclusively in one or more businesses. Whether a unit qualifies depends on its actual use at the time of acquisition, not how it's marketed.

Consider a buyer looking at a small office suite in a Fortitude Valley complex. The suite is advertised as commercial, but half the floor space is set up as a residence for the business owner. That arrangement won't meet the wholly and exclusively requirement. The property needs to be used entirely for business purposes at the time your SMSF acquires it. If there's a residential component, the property may not qualify at all, or only part of it might be treated as business real property.

In our experience, clients sometimes confuse commercial zoning with commercial use. A unit zoned mixed-use or commercial can still fail the test if the tenant is living there or using it for domestic purposes. The ATO's guidance in SMSFR 2009/1 sets out the detailed requirements, and it's worth reading if you're considering a property that isn't a straightforward retail or office lease.

Mistake 2: Buying multiple units under one LRBA

You cannot use a single Limited Recourse Borrowing Arrangement to acquire more than one unit, even if they're in the same complex and have the same value. 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 don't qualify, even if they're substantially similar. If you want to buy two units in a Southport complex, you'll need two separate LRBAs, two holding trusts, and two separate loan arrangements. That doubles the establishment cost, the annual trust maintenance, and the administrative load.

The exception applies where the properties are distinctly identifiable as a single asset, meaning they're bought and sold together and have equal market value. In practice, that's rare for units on separate titles. If you're planning to acquire more than one property, speak with an SMSF mortgage broker before committing to contracts.

Mistake 3: Overlooking the sole purpose test when leasing to a related party

If you're buying a commercial unit and leasing it to a business you're involved with, the lease must be on arm's length terms at market value. Business real property leased between the fund and a related party is excluded from the in-house asset rules, but that doesn't mean the arrangement is automatically compliant.

Every decision about the lease needs to satisfy the sole purpose test under section 62 of the SIS Act. Your fund must be maintained solely to provide retirement benefits to members. If you set the rent below market rate to help the business, or delay rent reviews to preserve cash flow, you risk breaching the test. The ATO has flagged related party leases as an area of focus, and a breach can result in penalties or loss of the fund's complying status.

Where a commercial unit is leased to a related party, get an independent valuation to confirm the rent is consistent with comparable properties in the area. Review the lease terms annually and document your decisions. If the business is struggling and you're considering rent relief, get advice before making changes.

Mistake 4: Using borrowed funds to improve the property after settlement

Borrowed funds under an LRBA cannot be used to improve an existing asset. Once your SMSF has acquired the unit, any capital improvements must be funded from the fund's cash reserves, not from drawdowns on the loan.

As an example, an SMSF buys a commercial unit in Cairns under an LRBA. After settlement, the tenant requests a fitout upgrade to accommodate additional staff. The trustee arranges a drawdown from the lender to cover the cost of internal walls and electrical work. That drawdown breaches the LRBA rules because the borrowed money can only be used to acquire the asset, plus associated costs like stamp duty and loan establishment fees.

If you're planning improvements, factor the cost into your deposit and borrowing capacity before you settle. The lender won't allow you to redraw for capital works, and attempting to do so can cause the entire arrangement to become non-compliant. Any renovation or fitout needs to come from accumulated rental income, member contributions, or other fund assets.

Division 296 tax and unrealised gains on units

From 1 July 2026, members with a total superannuation balance above $3 million are subject to an additional 15 percent tax on earnings attributable to the amount above that threshold. A further 10 percent applies to balances above $10 million. For SMSF purposes, Division 296 fund earnings are based on the fund's taxable income, not unrealised gains.

That means an increase in the value of your commercial unit doesn't trigger Division 296 tax until you sell and realise the gain. Rental income and capital gains on disposal may contribute to the Division 296 calculation, but an unrealised increase in property value does not by itself produce assessable income. LRBA amounts are disregarded when calculating your total superannuation balance for Division 296 purposes.

SMSFs could elect to adjust the cost base of CGT assets to market value as at 30 June 2026 for Division 296 fund earnings purposes. This election recognised accrued value prior to the commencement of Division 296 tax and had to be made by the due date of the 2026-27 SMSF annual return. If your fund didn't make that election and you're now holding a commercial unit acquired before that date, the cost base remains the original acquisition cost plus allowable capital improvements.

Refinancing an LRBA after the August changes

If you have an existing residential LRBA that was in place before 10 August 2026, you can still refinance to another lender without the refinanced arrangement being subject to the post-commencement rules. The ATO considers refinancing to mean entering into a new loan contract for the same asset, with the same or a new lender.

A significant change to the terms or conditions of the LRBA can end the arrangement and create a new one. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries. If you're refinancing an LRBA, make sure the loan relates to the same single asset and maintains the limited recourse character of the original arrangement.

For commercial LRBAs, refinancing is not affected by the 2026 changes. You can switch lenders, adjust loan terms, or consolidate debt, provided the refinanced loan still relates to the same asset and meets arm's length terms under PCG 2016/5. The ATO publishes safe harbour interest rates annually, and income from an arrangement that doesn't meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Queensland and can help you compare SMSF lenders, structure the holding trust, and confirm your borrowing capacity before you commit to a contract.

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