The easiest way to use super to buy storage facilities

Storage facilities qualify as business real property for Self-Managed Super Fund borrowing arrangements, making them one of the few property types you can still acquire with borrowed funds through your SMSF.

Since the legislative changes that took effect in August, your SMSF can no longer borrow to purchase residential property. Commercial assets including storage facilities remain accessible through Limited Recourse Borrowing Arrangements, provided the property satisfies the business real property definition under the Superannuation Industry (Supervision) Act. The distinction matters because storage facilities leased to commercial operators or the public typically meet the wholly and exclusively business use requirement, while properties with any residential component often do not.

What Qualifies a Storage Facility as Business Real Property

A storage facility qualifies when the land and buildings are used wholly and exclusively in one or more businesses. The property must be used for business purposes at the time your SMSF acquires it, and qualification depends on actual use rather than zoning or marketing descriptions. A facility leased to a commercial self-storage operator or used for warehousing business inventory satisfies this requirement. A property advertised as commercial storage but used partly for private household goods by the owner does not.

The business using the property does not need to be carried on by your SMSF. Consider a scenario where a storage facility in the Port Melbourne industrial precinct is leased to a third-party operator who manages customer rentals. The property qualifies as business real property because the operator uses it wholly for their commercial storage business. Your SMSF receives rental income while the operator handles day-to-day management. The arrangement satisfies both the business real property definition and the sole purpose test, provided the lease is on arm's length terms and the rental return reflects market rates.

How the Limited Recourse Borrowing Arrangement Works

Your SMSF borrows funds to acquire the storage facility, but the property is held in a separate bare trust until the loan is repaid. The SMSF holds a beneficial interest in the asset and receives all rental income and capital growth. If the loan defaults, the lender's recourse is limited to the property held in the trust, protecting other SMSF assets. Once the loan is repaid, legal ownership transfers from the bare trust to your SMSF.

The borrowed funds must be used to acquire a single asset. You cannot purchase multiple storage facilities on separate titles under one LRBA, even if they are adjacent or part of the same complex. Loan proceeds can cover the purchase price, stamp duty, and loan establishment costs, but cannot be used to improve the property after acquisition. Extensions, refurbishments, or facility upgrades must be funded from rental income or other SMSF cash reserves.

Deposit and Borrowing Capacity for Commercial SMSF Property

Lenders typically require a deposit of 30 to 40 percent for a commercial SMSF property loan. Borrowing capacity depends on the rental income the property generates, not your personal income or the SMSF's other assets. Lenders assess whether the rental income can service the loan, usually requiring rental coverage of at least 120 to 140 percent of the loan repayments.

Rental yield becomes the determining factor. A storage facility generating $60,000 per annum in net rent could support a loan with annual repayments of around $42,000 to $50,000, depending on the lender's serviceability requirements. At current variable rates for commercial SMSF lending, this might support a loan of approximately $500,000 to $600,000 over a 15-year term, though the actual amount varies by lender and individual circumstances. Your SMSF would need a deposit and costs buffer of $250,000 to $350,000 to proceed with a purchase in that range.

Interest Rates and Loan Terms for SMSF Storage Facility Purchases

Commercial SMSF loans typically carry variable rates higher than standard residential mortgages. Loan terms are generally capped at 15 years, though some lenders offer up to 20 years for high-quality commercial property with strong rental covenants. Principal and interest repayments are standard, though some lenders offer interest-only periods of up to five years.

If you are refinancing an existing SMSF loan, whether residential or commercial, the arrangement can proceed without being affected by the August legislative changes, provided the refinanced loan relates to the same asset and maintains the limited recourse character of the original LRBA. Refinancing to secure a lower interest rate or switch lenders is permitted under current ATO guidance. Where your SMSF borrowed from a related party, the refinanced loan must meet the arm's length safe harbour interest rates published annually by the ATO.

Rental Income, Tax Treatment, and Division 296 Considerations

Rental income received by your SMSF from a storage facility is taxed at 15 percent during the accumulation phase. Where your SMSF has commenced a pension and all assets are segregated as current pension assets throughout the income year, rental income and capital gains may be exempt from tax under the exempt current pension income provisions. Where the fund has both accumulation and pension interests, the exemption applies only to the proportion supporting the pension, as determined by an actuarial certificate.

A capital gain on the sale of a storage facility held for at least 12 months attracts a one-third discount, producing a maximum effective rate of 10 percent on the discounted gain during accumulation phase. The actual tax liability depends on the property's cost base, capital improvements, selling costs, and the fund's overall tax position for that year.

From July last year, Division 296 tax applies where a member's total superannuation balance exceeds $3 million. The tax is calculated on the proportion of earnings attributable to the amount above that threshold. Only realised capital gains contribute to the Division 296 earnings base. An unrealised increase in the value of your storage facility does not trigger Division 296 tax until a CGT event occurs. LRBA amounts are disregarded when calculating your total superannuation balance for Division 296 purposes, meaning only your net equity in the property is included.

Leasing to Related Parties and Arm's Length Requirements

Business real property can be leased to a related party of the fund without breaching the in-house asset rules, but the lease must be on arm's length terms at market rent. Consider a scenario where your SMSF purchases a storage facility and leases it to a company you control. The arrangement is permitted provided the lease reflects commercial terms, the rent matches what an independent tenant would pay, and the lease is documented with the same conditions a third-party landlord would require. An independent valuation of the market rent protects the SMSF from ATO scrutiny and ensures compliance with the sole purpose test.

Leasing to a related party at below-market rent may breach the sole purpose test by providing a present-day benefit to the member or their business. Income from such an arrangement could be assessed as non-arm's length income and taxed at 45 percent. The same risk applies where your SMSF borrows from a related party at an interest rate below the ATO's published safe harbour rates.

SMSF Compliance and the Sole Purpose Test

Every investment your SMSF makes, including a storage facility acquired under an LRBA, must be maintained solely to provide retirement benefits to members. Decisions that give you or a related party a present-day benefit may contravene the sole purpose test. Storing your personal goods in the facility, allowing a family member to use the property for below-market rent, or using the facility for any non-commercial purpose creates compliance risk.

The property cannot be acquired from a related party, even if the price reflects market value. Your SMSF can purchase the storage facility from an unrelated third party and later lease it to a related party on arm's length terms, but the initial acquisition must be from an arm's length seller.

Why Elwood Residents Consider Storage Facilities for SMSF Investment

Elwood residents often hold significant superannuation balances and seek commercial property as a diversification strategy within their SMSF. The bayside suburbs, including nearby Port Melbourne and South Melbourne, have established industrial and commercial precincts where storage facilities are actively traded. Proximity to these precincts makes commercial property investment practical for local SMSF trustees who prefer assets within their geographic knowledge.

Storage facilities offer relatively passive management compared to office or retail property, particularly where the facility is leased to an experienced operator on a long-term lease. The tenant manages customer interactions, security, and maintenance, while your SMSF receives a stable rental income. The capital intensity of a storage facility purchase typically suits members approaching retirement who want to consolidate their SMSF into a single high-value asset with reliable income to support a pension.

Call one of our team or book an appointment at a time that works for you. We can connect you with SMSF specialists who understand the current legislative environment and the lenders actively writing commercial SMSF loans for storage facilities.

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