Step 1 — Confirm the fund and property are eligible
Before any acquisition activity, two eligibility questions must be confirmed. First, does the SMSF have the structural capacity to hold the property — sufficient cash for deposit and acquisition costs (typically 35–40% of property value), appropriate trust deed provisions, and member ages and balances consistent with the long-hold nature of commercial property. Second, does the property qualify as Business Real Property (BRP) under the SIS Act — commercial property used wholly and exclusively in business, which is the only property type the SMSF can purchase from a related party and the only property a related-party business can lease back from the SMSF.
Both questions should be confirmed in writing with the SMSF accountant and (where the property is being purchased from a related party or leased back to a related-party business) with a licensed SMSF specialist. Acquisition of property that subsequently fails the BRP test can trigger material ATO consequences including the property being treated as an in-house asset.
Step 2 — Establish the bare trust structure
An SMSF cannot directly hold a leveraged property under SIS Act limited recourse borrowing arrangement (LRBA) rules. The property must be held in a separate holding trust (commonly called a 'bare trust' or 'security custodian trust'), with the SMSF as beneficial owner. The bare trust is a tax-transparent entity that exists solely to hold the property during the loan period; on full repayment of the loan, the property can be transferred from the bare trust to the SMSF directly.
Establishing the bare trust requires: a separately constituted trustee (often a custom corporate trustee specifically for the bare trust), a deed of trust prepared by an SMSF-specialist lawyer, and registration of the trust with the ATO. The cost is typically $1,500–$3,500 for legal setup; timing is 2–3 weeks. Critically, the bare trust must be established before the property contract is signed, and the contract must be in the name of the bare trust (not the SMSF directly).
Contract in the wrong name is hard to fix
A contract signed in the name of the SMSF directly, or in the name of an individual trustee, generally cannot be transferred to a bare trust after the fact without re-stamping the contract (incurring duplicate stamp duty). Confirm contract counterparty correctly before signing.
Step 3 — Arrange the LRBA loan
SMSF commercial loans are written by a specialist sub-set of lenders — major banks have largely exited the SMSF lending space since 2018, leaving the field dominated by specialist non-bank SMSF lenders and a small number of mid-tier banks still active in the segment. Loan arrangement typically runs in parallel with bare trust setup and is generally complete in 4–6 weeks from initial application to formal approval.
Lender requirements: indicative pre-approval before contract is generally available based on fund balance and proposed property profile; formal approval requires the executed contract, the bare trust deed, fund financials for the last 2 years, member statements, and the property valuation. LVR typically caps at 65–70% on tenanted commercial, slightly lower on owner-occupier commercial under related-party lease arrangement.
Step 4 — Execute the contract and complete due diligence
The property contract is executed in the name of the bare trust (via the bare trust's trustee), with the SMSF identified as beneficial owner where the contract template permits. Standard commercial due diligence applies — legal review, lease verification, building inspection, environmental assessment, market evidence verification — with the addition of explicit SIS Act compliance review on the property's BRP status.
Settlement timing on an SMSF commercial deal is typically 60–90 days from contract, reflecting the longer process for loan formalisation and bare trust completion. Contract terms must be drafted to accommodate this; the standard residential 30–42 day settlement is too tight for SMSF commercial.
Step 5 — Settlement mechanics
At settlement, the following sequence occurs: the SMSF transfers the deposit and equity portion (35–40% of purchase plus stamp duty and legal costs) to the legal practitioner's trust account; the lender disburses the loan proceeds (60–65% of purchase) directly to the same trust account; the legal practitioner settles the purchase, registering the bare trust as title holder and the SMSF as beneficial owner; the lender's first mortgage is registered over the bare trust's title.
Personal guarantees from members are commonly required by SMSF commercial lenders despite the technical limited-recourse nature of LRBAs. This is a structural quirk of the SMSF lending market that members should expect; the alternative (no personal guarantee) is available at a small number of specialist lenders at materially wider pricing.
Step 6 — Post-settlement compliance
Three post-settlement obligations carry SIS Act compliance weight and require disciplined execution. First, the lease (if the property is to be tenanted by a related-party business) must be at arm's-length market rent, supported by independent rental evidence, with rent paid on commercial terms — late or under-market rent triggers in-house asset risk. Second, fund administration must reflect the property correctly in member statements, with appropriate treatment of loan interest as a fund expense and rental income as fund revenue. Third, annual SIS Act compliance audit must include explicit review of the LRBA and the BRP status.