# 'So I'll just buy a commercial property instead.' That's when the questions started

The call came in before nine this morning, and the man on the end of it was not distressed. He was decisive, which in this case was the problem.

He is 51, runs a small plumbing business, and has spent a decade building a self-managed super fund with his wife. He had been planning to buy a house inside the fund. He knew that option closed today, and had already moved on:

"So I'll just buy a commercial property instead. That's still allowed, isn't it?"

Sometimes. That is the honest answer, and the gap between sometimes and yes is where this gets expensive.

He then asked the follow-up almost nobody asks, which is the reason he will be fine: "What actually makes something commercial?"

What the rule really says

From today, a self-managed super fund can no longer enter a new borrowing arrangement to buy residential property. That much has been reported everywhere, and is broadly right. But it is not what the legislation says, and the difference is not academic.

The rule does not say you may not borrow to buy residential property. It says that where a fund borrows to acquire real property, that property must be business real property. As one superannuation lawyer working through the drafting put it, what has actually been created is a ban on acquiring anything that is not business real property.

That sounds like a distinction without a difference. It isn't, because the test has nothing to do with what a building looks like. It turns on whether the land is used wholly and exclusively in one or more businesses.

Not mostly. Not primarily. Wholly and exclusively.

Follow that through and you get two results most people find surprising:

  • A residential property used wholly in a business can satisfy the definition.
  • A commercial property only partly used in a business generally does not.

So the shorthand everyone is using — residential banned, commercial fine — is wrong at both ends.

Why this definition is causing so much trouble

The term policing this rule was not written for it. It was inserted into superannuation law more than two decades ago to do a different job: limiting what a fund may buy from, or lease to, a related party. Until now, most trustees only met it in those narrow situations.

It has now been made the gatekeeper for every geared property purchase a fund makes. The sector's peak body has said, in polite language, that this produces idiosyncrasies and unintended consequences. A specialist adviser put it more bluntly, questioning whether a fund can now borrow to buy a brand-new commercial building at all — because a property that has never been occupied has no established business use to demonstrate. Consider a fund buying a new office suite off the plan: unambiguously commercial in every ordinary sense, and it may still fail the test on the day of purchase, because on that day nothing is being used in a business.

Roughly a quarter of SMSF investors say they intend to redirect into commercial property inside the fund precisely because borrowing there survives. A meaningful number are relying on a category the law does not recognise in the form they imagine.

One mechanical point, because it is being got wrong

The trigger is the date of the contract — the date of exchange. Not settlement, and not loan approval. A contract dated yesterday or earlier sits outside the ban entirely: the property can be residential, the fund can still borrow, and it does not matter when the lender approves. A contract dated today or later must satisfy the business-real-property test. Related, and widely misunderstood: refinancing an existing pre-ban loan does not pull it into the ban, because existing arrangements are grandfathered.

Our caller had exchanged on nothing. That is why his next decision matters so much.

What this means for you

The rule changed the wrapper. It did not change the asset.

If you were going to buy a residential investment property through your fund and now buy it in your own name, almost everything about the tax treatment, the borrowing capacity and the eventual exit is different. What is unchanged is the thing that determines whether the property was worth owning: which address it is, and which street it sits on.

And the pressure on that question has gone up, not down. Most people in this position will make fewer purchases than they planned. When the number of shots you get falls, the quality of each one stops being an optimisation and becomes the whole result.

This is where resolution does real work. Our research consistently finds effective yield spreads of 20 to 30 per cent between the best and worst streets inside a single suburb — same postcode, same median, same commentary, materially different outcomes. Days on market, vacancy behaviour, tenant depth and the supply pipeline all move street by street, in ways a suburb median is structurally incapable of showing you. That gap was always there; it was simply easier to survive when you could spread a mistake across several assets.

If you are considering a commercial purchase inside a fund because you read that it remains permitted, get the business-real-property question answered in writing, by someone qualified, before you exchange.

The part worth remembering

A door closed today, and for people mid-transaction that is genuinely disruptive.

But nothing that happened today changed what makes a property a good investment. Rent is still paid by a tenant who chose a street. Value is still set by what someone will pay for that address, on that block. Legislation can change how you hold an asset and how it is taxed. It cannot change which side of a suburb people actually want to live on.

The investors who do well from here will not be the ones who found the cleverest structure. They will be the ones who, having lost some flexibility, respond by being far more precise about what they buy — because the structure was never the edge. The selection was.

General information only. This article does not take into account your objectives, financial situation or needs, and is not financial, taxation, superannuation or legal advice. Superannuation borrowing rules are complex and the consequences of getting them wrong can be significant. Seek advice from a licensed professional before acting.