Using Your SMSF to Purchase an Industrial Property

Industrial Property Through Your SMSF: What Changes

Your self-managed super fund can purchase industrial property, but the transaction must meet the sole purpose test and operate through a Limited Recourse Borrowing Arrangement. The property exists to provide retirement benefits to fund members, which means you cannot use the warehouse yourself, lease it to a related party, or operate your own business from the premises.

Consider a scenario where a Sylvania couple running a successful distribution business approached us about purchasing their warehouse through their SMSF. They had substantial super balances and wanted to secure the property long-term. The problem: their fund could buy the warehouse, but they could not lease it back for their own business. The sole purpose test prohibits any arrangement where members or related parties benefit outside of retirement savings. They ultimately purchased through a different structure, but the scenario illustrates how strict the compliance boundaries are with SMSF commercial property acquisitions.

SMSF Commercial Loan Structure and LVR Limits

Most lenders cap SMSF commercial loans at 70% LVR, which means your fund needs a 30% deposit plus costs. The loan sits within a bare trust arrangement where the property is held separately from your main fund until the debt is fully repaid. Once you own the property outright, it transfers into the SMSF proper.

A typical industrial unit in the Taren Point or Kirrawee industrial precincts might cost $800,000 to $1.2 million. At 70% LVR on a $900,000 property, your SMSF would need $270,000 in cash for the deposit, plus stamp duty, legal fees, and acquisition costs. That total outlay could reach $310,000 before you settle. If your fund holds this amount across member balances, the structure works. If not, you would need to make additional contributions within your annual caps or wait until the balance builds.

Lenders assess SMSF loans differently to standard investment lending. They evaluate the fund's cash flow from existing assets, the rental income the property will generate, and whether the fund can service the loan from investment returns without requiring constant member contributions. An industrial property leased to a stable tenant on a five-year term with annual increases supports this assessment far more readily than a vacant unit requiring fit-out.

SMSF Variable Rate vs Fixed Rate on Industrial Property

SMSF commercial loan rates typically sit higher than residential investment rates. Variable rates on SMSF commercial loans currently range from approximately 1.5% to 2% above standard variable residential rates, depending on the lender and your fund's deposit size.

Fixed rates are available but less common for SMSF commercial lending. Most lenders prefer variable structures because the loans are smaller in volume and the administrative cost of offering fixed terms at scale does not justify the pricing. When fixed rates are offered, they tend to lock for shorter periods - two or three years rather than five - and the rate premium over variable can be significant.

Your decision between variable and fixed depends on your fund's cash reserves and your tolerance for rate movements. A fund with strong cash flow from multiple assets can absorb rate rises more readily than a fund where a single industrial property represents the majority of the balance. We regularly see funds with $600,000 to $800,000 in total assets purchasing industrial properties at the upper end of their capacity. In those scenarios, a rate increase of even 1% can pressure the fund's ability to meet loan repayments from rental income alone, requiring members to contribute additional funds.

Rental Income, Tax, and Capital Gains Within the SMSF

Rental income from an industrial property held in your SMSF is taxed at 15% during the accumulation phase. When the fund moves into pension phase, that income becomes tax-free. Capital gains on property sold during accumulation are taxed at 15%, or 10% if the property was held for more than 12 months and the CGT discount applies.

An industrial unit purchased for $900,000 and leased at $55,000 per annum delivers $46,750 after tax during accumulation. Over a decade, assuming modest capital growth of 3% per annum and rental increases of 2.5% annually, the property could be worth approximately $1.2 million. If sold after moving into pension phase, the gain would be entirely tax-free. If sold during accumulation with the CGT discount, the tax liability on a $300,000 gain would be $30,000 rather than $45,000.

This tax treatment makes industrial property particularly attractive for funds with members approaching retirement. The window between purchasing the property and transitioning the fund to pension phase might be only five to seven years, meaning the tax-free income period could span decades.

Sylvania's Industrial Precinct and Tenant Demand

Sylvania sits within the broader Sutherland Shire industrial corridor, with nearby precincts in Taren Point, Kirrawee, and Gymea offering established warehouse and light industrial stock. Tenant demand in this area has remained consistent due to proximity to Port Botany, the M1 motorway, and southern Sydney's residential growth. Businesses requiring distribution, storage, or light manufacturing favour these locations for logistics access without the cost premiums of inner-south industrial areas.

When evaluating industrial property for your SMSF, the strength of the lease matters more than almost any other factor. A property leased to a national tenant on a five-year term with built-in rent reviews will support your SMSF loan application far more readily than a month-to-month arrangement with a small local operator. Lenders assess tenant creditworthiness as part of their serviceability calculation, and a weak tenant can limit your borrowing capacity even if your fund has a strong deposit.

SMSF Loan Application and Borrowing Capacity

Your fund's borrowing capacity depends on rental income, existing fund assets, and the lender's serviceability assessment. Most lenders require the property to service the loan at an assessed rate - typically the actual rate plus a buffer of 2% to 3%. The rental income must cover loan repayments at this higher rate without relying on member contributions.

In a scenario where your SMSF seeks to borrow $630,000 at a variable rate for an industrial property generating $55,000 in annual rent, the lender will assess serviceability at a higher rate to stress-test the arrangement. If the loan repayment at the assessed rate exceeds the net rental income, the lender may reduce the loan amount or decline the application. Having additional cash reserves within the fund - perhaps from shares or term deposits - strengthens the application by demonstrating the fund can absorb temporary vacancies or rate increases.

Comparing SMSF lenders is essential because policy varies significantly. Some lenders will not touch industrial property at all, preferring residential only. Others will lend on commercial property but require higher deposits or shorter loan terms. Working with an SMSF mortgage broker who understands which lenders actively write SMSF commercial loans saves time and positions your application where it has the strongest chance of approval.

Structuring the Purchase and Bare Trust Requirements

The Limited Recourse Borrowing Arrangement requires a bare trust to hold the property until the loan is repaid. Your SMSF trustee cannot hold the property directly while debt exists. The bare trust is a separate legal entity, and the trustee of that bare trust - often the same individuals or company acting as SMSF trustee - holds the property on behalf of the fund.

This structure means if your SMSF defaults on the loan, the lender's recourse is limited to the property held in the bare trust. They cannot pursue other assets within your SMSF or your personal assets outside the fund. Once the loan is fully repaid, the property transfers from the bare trust into the SMSF, and the bare trust is dissolved.

Legal and accounting costs for establishing the bare trust, drafting the loan documents, and ensuring compliance with superannuation law typically range from $3,000 to $5,000. These are one-time setup costs, but they must be paid from the SMSF's existing cash reserves. Factoring these into your deposit calculation ensures your fund has sufficient liquidity to settle without scrambling for additional contributions.

Call one of our team or book an appointment at a time that works for you. We will walk through your fund's position, the property you are considering, and which lenders align with your situation. The conversation is straightforward, and you will know within days whether the structure works for your circumstances.

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