The Pros and Cons of SMSF Loans for Mixed-Use Property

A mixed-use property in St Kilda East might include a ground-floor retail space with residential apartments above, or a commercial office with an attached dwelling.

When you're considering purchasing this type of asset through your Self-Managed Super Fund, you're entering territory that combines the lending requirements of both residential and commercial property. The approach your SMSF takes will depend on how lenders classify the property and whether the structure meets the sole purpose test.

How Lenders Classify Mixed-Use Property for SMSF Loans

Lenders assess mixed-use property based on the dominant use. If the commercial component represents more than 50% of the property's value or floor space, it's typically treated as a commercial SMSF loan. If residential use dominates, it may qualify under residential lending criteria.

This classification affects your loan-to-value ratio, interest rate, and deposit requirements. Non-bank and specialist lenders are now offering LVRs up to 80% for both residential and commercial property investments, which represents a significant shift from the 60-70% range that was standard until recently. However, mixed-use properties often sit somewhere in between, with many lenders offering 70-75% LVR depending on the tenant mix and income profile.

Consider a scenario where your SMSF is looking at a property on Inkerman Street with street-level commercial space leased to a cafe and two residential units upstairs. If the commercial space accounts for 60% of the rental income and floor area, expect the loan to be assessed under commercial criteria.

Rental Income and the Sole Purpose Test

The property must generate income that contributes solely to retirement benefits for fund members. Both the commercial and residential components need to be leased to unrelated parties at market rates.

SMSFs are restricted from holding more than 5% of their total assets in in-house assets, which includes property leased to a related party. If you're planning to lease the commercial space to a business you're involved with, or the residential component to a family member, you'll breach this rule unless specific exceptions apply. Most lenders won't finance the arrangement if there's any indication of related-party use.

The rental income from both components is taxed at 15% while held in accumulation phase, or zero if your fund is in pension phase. This makes a well-tenanted mixed-use property particularly appealing from a tax perspective, provided both tenancies remain at arm's length.

Deposit Requirements and Borrowing Capacity

Your SMSF will need sufficient cash or liquid assets to cover the deposit, acquisition costs, and a buffer for any vacancy periods. At 75% LVR, which is common for mixed-use property, you're looking at a 25% deposit plus stamp duty, legal fees, and establishment costs.

The fund's borrowing capacity depends on the rental income from both the commercial and residential components. Lenders typically apply a serviceability buffer and stress test the loan at a rate above the actual interest rate. If one tenancy is vacant or due to expire shortly after settlement, expect the lender to reduce their assessment of sustainable income.

In our experience, mixed-use properties in St Kilda East near Chapel Street or the Caulfield line often have strong rental appeal for both components, which supports the serviceability case when presenting the loan to lenders.

Limited Recourse Borrowing Arrangement and Bare Trust Structure

Every SMSF property loan must be structured as a Limited Recourse Borrowing Arrangement. The property is held in a bare trust, with your SMSF as the beneficiary. If the loan defaults, the lender's recourse is limited to the property itself and cannot extend to other assets within the fund.

Each LRBA covers a single property. If your SMSF already has one property under a Limited Recourse Borrowing Arrangement and you want to purchase a second mixed-use asset, you'll need a separate loan and a separate bare trust.

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 if you're planning to convert part of the residential component into additional commercial space, or add a level, those changes must wait until the loan is repaid. This restriction is particularly relevant for mixed-use property, where the potential to reconfigure or expand is often part of the appeal.

Interest Rates and Related-Party Loan Compliance

If the loan is provided by a related party rather than a commercial lender, it must be structured on an arm's length basis. For the 2025-26 financial year, the safe harbour interest rate for LRBAs used to acquire real property is 8.95%. If your fund borrows from a related party at a rate below this threshold, the ATO may deem the arrangement non-compliant.

Most SMSFs purchasing mixed-use property will use a commercial lender or non-bank specialist. Interest rates vary depending on whether you're assessed under residential or commercial property loan criteria, but expect rates to sit above standard home loan rates due to the increased complexity and perceived risk.

Fixed and variable rate options are both available. A fixed rate provides certainty, which can be useful if your fund's cash flow is tight or you're concerned about rate movements. A variable rate offers flexibility if you plan to make additional repayments or pay down the loan faster as the fund's balance grows.

Trustee Training and Compliance Obligations

New rules require trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance may result in penalties of up to $19,800, or even fund disqualification.

The ATO has increased its focus on SMSFs with borrowing arrangements, particularly where mixed-use property is involved. Record-keeping must be rigorous. You'll need to demonstrate that rental income is at market rates, that all expenses are correctly allocated, and that the property continues to meet the sole purpose test throughout the loan term.

If you're a trustee of a fund considering this type of purchase in St Kilda East, you'll need to factor in the time and cost of meeting these obligations, as well as the annual audit and actuarial certificate if the fund is in pension phase.

Capital Gains Tax and Exit Strategy

When your SMSF eventually sells the mixed-use property, capital gains are taxed at 15% if held for less than 12 months, or 10% if held longer and the fund is in accumulation phase. If the property is sold while the fund is in pension phase, the capital gain is tax-free.

Mixed-use property in St Kilda East, particularly near the retail and dining precinct around Carlisle Street and Balaclava Village, can experience strong capital growth due to gentrification and infrastructure investment. However, the illiquid nature of mixed-use property means your fund needs a clear exit strategy. If the fund needs liquidity to meet pension payments and the property can't be sold quickly, you may face cash flow pressure.

Planning for this scenario is part of the broader SMSF borrowing capacity assessment. Your fund should have sufficient liquid assets outside the LRBA to meet member benefits and operating expenses without being forced to sell at an inopportune time.

If you're weighing up whether a mixed-use property in St Kilda East suits your Self-Managed Super Fund, the decision comes down to your fund's asset mix, cash flow, risk tolerance, and the specific property's tenancy profile. The right structure and lender can make the arrangement work, but the compliance and planning requirements are significant. Call one of our team or book an appointment at a time that works for you.

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