A Limited Recourse Borrowing Arrangement lets your Self-Managed Super Fund purchase an office building without risking assets outside the fund.
For nurses running a private practice or considering a commercial property investment through super, buying an office building via an SMSF can deliver rental income taxed at a maximum of 15% while the fund is in accumulation phase, and potentially zero tax in pension phase. The structure requires specific compliance measures, but the tax advantages and control over your retirement asset make it worth understanding properly.
How a Limited Recourse Borrowing Arrangement works for commercial property
Your SMSF borrows to purchase a single office building, which is held in a bare trust until the loan is repaid. The lender's recourse is limited to that property alone. If the loan defaults, the lender cannot pursue other assets in your fund or your personal assets.
Consider a registered nurse who operates a private wound care clinic and wants to purchase the commercial premises she currently leases. Her SMSF borrows 70% of the $600,000 purchase price through a specialist lender. The office building is held in a bare trust with her SMSF as trustee. The clinic pays market-rate rent to the SMSF, which uses that income to service the loan. Once the loan is repaid, the property transfers from the bare trust into the SMSF's name. Rental income during accumulation is taxed at 15%, compared to her marginal tax rate of 37% plus Medicare levy if she owned the property personally.
LVR and deposit requirements for office buildings
Non-bank and specialist lenders now offer loan-to-value ratios up to 80% for commercial property held in SMSFs, a significant shift from the 60-70% range that was standard until recently. That means a 20% deposit, plus costs.
Settlement costs for a commercial SMSF purchase typically include stamp duty, legal fees for both the SMSF and the bare trust, building and pest inspections, and valuation fees. Budget an additional 5-7% of the purchase price for these costs. Your SMSF must have sufficient cash flow to cover both the deposit and these upfront expenses without breaching liquidity requirements.
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The sole purpose test and leasing to your own practice
The property must exist purely to generate retirement benefits for fund members. You cannot use it for personal purposes, but leasing to a related party such as your own nursing practice is permitted under strict conditions.
SMSFs are restricted from holding more than 5% of their total assets in in-house assets, which includes property leased to a related party unless an exemption applies. Business real property is exempt from this rule, meaning your SMSF can lease an office building to your practice without breaching the 5% limit, provided the lease is on commercial terms. That means market rent, a formal lease agreement, and proper documentation. The rent your practice pays must reflect what an independent tenant would pay for the same premises.
In a scenario where a nurse practitioner's SMSF owns the building her telehealth consultancy operates from, the lease must be reviewed annually to confirm the rent remains at market rates. If comparable offices in the area lease for $35,000 per year, charging your practice $20,000 would breach the arm's length requirement and risk penalties or fund disqualification.
What you can and cannot change while the loan is active
You cannot use the LRBA to fund structural improvements or anything that changes the fundamental character of the property while the loan is outstanding. Repairs and maintenance are permitted, but structural changes such as adding a second storey, subdividing the building, or converting office space into residential units are not.
If the building needs a new roof or the air conditioning system fails, those repairs can be funded by the SMSF. If you want to knock down an internal wall to create an open-plan workspace, that would be considered a structural change and is not permitted until the loan is repaid and the property is transferred into the SMSF's name. This restriction is specific to LRBAs and is designed to protect lenders from changes that might affect the property's value or character.
How rental income and capital gains are taxed in your fund
Rental income from the office building is taxed at a maximum of 15% while your SMSF is in accumulation phase. Once the fund moves into pension phase, that income is typically tax-free. Capital gains on property held for more than 12 months receive a one-third discount in accumulation phase, resulting in an effective tax rate of 10%. In pension phase, capital gains are generally not taxed.
For nurses building retirement wealth outside the constraints of employer super, this tax treatment is one of the strongest arguments for holding commercial investment property through an SMSF. The compounding effect of lower tax on income and growth can make a material difference over a 10 or 15-year period.
Safe harbour interest rates and related-party loans
For the current financial year, the safe harbour interest rate for LRBAs used to acquire real property is 8.95%. This rate applies to related-party loans, where the SMSF borrows from a member or related entity rather than a commercial lender. If your loan is structured as a related-party arrangement, the interest rate must be at or above this benchmark to satisfy arm's length requirements.
Most office building purchases will involve a commercial lender, which sets its own rate based on the property, the SMSF's financial position, and the LVR. Related-party loans are less common for commercial property due to the higher amounts involved, but the safe harbour rate provides a useful reference point for ensuring compliance if that structure is used.
Trustee training and compliance obligations
New rules require all trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance can result in penalties of up to $19,800, or fund disqualification in serious cases.
SMSFs with borrowing arrangements face heightened scrutiny through data-matching and transaction-monitoring. Rigorous record-keeping is not optional. Each loan covers a single property in a separate bare trust, meaning two office buildings would require two separate LRBAs. By mid-decade, LRBA assets had reached $75 billion, reflecting both the popularity of the structure and the increased regulatory focus that comes with it.
Working with a broker who understands both SMSF and nursing work patterns
SMSF lending is handled by a small group of specialist and non-bank lenders. Not all mortgage brokers have access to these lenders or understand the nuances of SMSF compliance, particularly for nurses whose income may include shift penalties, overtime, and salary packaging.
A mortgage broker familiar with both SMSF structures and nursing income can identify lenders who will assess your application properly, help structure the loan to meet compliance requirements, and coordinate with your SMSF accountant and solicitor to make sure the bare trust, lease agreement, and loan documentation align. The structure is not complicated, but it requires precision. Getting it wrong can delay settlement or trigger penalties.
Call one of our team or book an appointment at a time that works for you. We work with registered nurses who want control over their retirement property investments and understand the requirements that come with it.
Frequently Asked Questions
Can my SMSF borrow 80% to buy an office building?
Yes, non-bank and specialist lenders now offer loan-to-value ratios up to 80% for commercial property held in SMSFs, up from the historically conservative range of 60-70%. You will need a 20% deposit plus settlement costs, which typically add another 5-7% of the purchase price.
Can I lease the office building to my own nursing practice?
Yes, provided the property qualifies as business real property and the lease is on commercial terms. The rent must reflect market rates, you need a formal lease agreement, and the arrangement must be reviewed annually to ensure it remains at arm's length. Business real property is exempt from the 5% in-house asset limit.
What happens if I want to renovate the building while the loan is active?
You cannot make structural changes that alter the fundamental character of the property while the LRBA is outstanding. Repairs and maintenance such as replacing a roof or fixing air conditioning are permitted, but changes like adding a second storey or subdividing the building are not allowed until the loan is repaid.
How is rental income from the office building taxed in my SMSF?
Rental income is taxed at a maximum of 15% while your SMSF is in accumulation phase. Once the fund moves into pension phase, rental income is typically tax-free. Capital gains on property held for more than 12 months receive a one-third discount in accumulation phase, resulting in an effective tax rate of 10%.
Do I need to complete training to borrow through my SMSF?
Yes, all trustees must complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance can result in penalties of up to $19,800, or fund disqualification in serious cases. This training requirement applies to both new and existing trustees.
