Proven Tips to Lease Commercial Property to Your Business

Business owners in Officer and Officer South who operate through a company or trust can use their self-managed super fund to purchase commercial premises and lease the property back to the operating entity.

This arrangement allows the fund to hold business real property under a Limited Recourse Borrowing Arrangement while the related party business pays rent at market rates. The rental income flows to the fund and is taxed at 15 percent during accumulation phase or zero percent once the member starts a pension. The arrangement must satisfy the business real property definition under section 66 of the SIS Act and comply with arm's length leasing terms to avoid regulatory issues.

What Qualifies as Business Real Property Under Section 66

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the entity holding the property. A commercial warehouse in Officer leased to a related party logistics company qualifies. A mixed-use building where the main use is domestic or private does not qualify, even if part of the building is used for business purposes. A dwelling occupying no more than 2 hectares can still qualify if the main use of the whole property is for business.

The classification depends on actual use at the time of acquisition. Vacant land not currently used in a business does not meet the definition. A property rezoned from residential to commercial does not automatically qualify until it is actively used for business purposes.

SMSF Commercial Loans After the 2026 Residential Ban

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026, with the provision prohibiting new limited recourse borrowing arrangements for residential property commencing 45 days after Royal Assent, placing the operative date at approximately 10 August 2026. Commercial property that satisfies the business real property definition is not affected by the ban. SMSFs may still acquire residential property using existing fund assets without borrowing, but the property cannot be acquired from a related party and cannot be occupied by a fund member or a related party of a member.

Consider a fund with $600,000 in accumulated savings that wants to acquire a commercial unit in the Officer precinct. If the property is used wholly and exclusively for business purposes and leased to a related party entity at market rent, the fund can borrow to acquire the asset under an LRBA. The related party lease does not trigger in-house asset issues because business real property is excluded from those rules.

How the Limited Recourse Borrowing Arrangement Works

The borrowed money must be used to acquire a single asset or a collection of identical assets with the same market value that can be treated as a single asset. The asset is held in a bare trust, with the SMSF acquiring a beneficial interest. Legal ownership transfers to the fund once the loan is repaid. If the loan defaults, only the asset held in trust is at risk. The asset cannot be subject to any charge other than under the LRBA.

Borrowed funds cannot be used to improve an existing asset. A property already owned by the fund cannot be placed into an LRBA. Drawdowns for capital improvements are not permitted for arrangements entered into on or after 7 July 2010. Expenses such as loan establishment costs and stamp duty may be covered by the borrowing.

Multiple real property titles cannot be acquired under a single LRBA unless the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together. Two adjoining warehouse units on separate titles do not qualify even if they operate as a single facility.

Arm's Length Leasing Terms and In-House Asset Rules

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. The lease must be made on arm's length terms at market value. A lease that does not reflect market rent may cause the income to be assessed as non-arm's length income and taxed at the highest marginal rate.

The ATO publishes safe harbour interest rates for SMSF loans under PCG 2016/5. These rates are updated annually and apply to both real property and listed securities held under an LRBA. A lease agreement should document market rent, rent review mechanisms, and maintenance obligations consistent with comparable commercial leases in the Officer area.

In our experience, funds that document independent rental valuations at the time the lease is signed and at each rent review avoid disputes with the regulator. The lease should be in writing and signed before the property settles.

Division 296 Tax and Total Superannuation Balance Considerations

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds the large super balance threshold of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the threshold. Where the total superannuation balance exceeds the very large super balance threshold of $10 million, an additional 10 percent Division 296 tax applies to the proportion of earnings above that threshold.

Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. This inclusion can push a member over the relevant threshold and trigger Division 296 tax on a portion of earnings.

As an example, a member with a total superannuation balance of $2.8 million who enters into an LRBA with a related party lender for $400,000 may have a total superannuation balance of $3.2 million for Division 296 purposes. Earnings attributable to the $200,000 above the threshold would be subject to the additional 15 percent tax.

Refinancing and Maintaining Existing Arrangements

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 provides that the residential LRBA prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at 2 July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new LRBA under the post-commencement rules.

Refinancing of commercial loans under an LRBA is not affected by the residential ban. The refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms consistent with PCG 2016/5. A significant change to the terms or conditions of an LRBA may end the existing arrangement and create a new one. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement.

A fund that refinances a commercial LRBA to access a lower rate with a different lender should maintain the same security property, the same bare trust structure, and the same beneficial ownership. The new loan must be limited in recourse to the asset held in trust.

Deposit Requirements and Borrowing Capacity for SMSF Commercial Property

Most SMSF lenders require a deposit of at least 30 percent for commercial property, meaning the loan to value ratio is capped at 70 percent. Some lenders accept lower deposits for specific property types or where the fund has significant other assets. The fund must have sufficient cash or liquid assets to cover the deposit, stamp duty, legal costs, and loan establishment fees without breaching contribution caps or liquidity requirements.

Borrowing capacity depends on the rental income the property will generate, the fund's ability to service the loan from rental income and any additional contributions, and the lender's assessment of the fund's overall financial position. A property in Officer leased to a related party logistics business generating $50,000 per annum in rent can typically support a loan with annual repayments below that figure, provided the lease is documented and the rent is at market value.

Lenders assess serviceability on the assumption that the fund must be able to meet loan repayments from rental income alone in most cases. Funds that rely on ongoing member contributions to service the loan may face difficulty if a member becomes unable to contribute due to retirement, redundancy, or other circumstances.

If you operate a business in Officer or Officer South and want to explore whether your self-managed super fund can acquire your commercial premises under an LRBA, call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can connect you with advisers who understand the regulatory and tax implications of related party leasing arrangements.

Frequently Asked Questions