Simple hacks to lease your SMSF property to your business

Leasing a commercial property owned by your SMSF back to your business is permitted under superannuation law, but the arrangement must satisfy strict compliance conditions at every stage.

The approach is most often used by business owners who want to build wealth through their SMSF while securing premises for their operating company. The rental income flows to the fund, the business gains stable occupancy, and the property may appreciate over time. The compliance risk sits with the trustees, not the business, so understanding the regulatory framework before committing to a purchase is not optional.

What qualifies as business real property under the SIS Act

Business real property is land and buildings used wholly and exclusively in one or more businesses. The definition is set out in section 66 of the Superannuation Industry (Supervision) Act 1993 and applies whether the property is acquired with borrowed funds or purchased outright by the SMSF.

The business operating in the property does not need to be carried on by the fund itself. Your SMSF can own the property and your related company can lease it, provided the property is used wholly and exclusively for business purposes. A property marketed as commercial does not automatically satisfy the definition. What matters is the actual use at the time of acquisition and throughout the period of ownership.

Consider a business owner in San Remo who operates a marine services company and wants to purchase a warehouse through their SMSF. The warehouse is on a single title, used entirely for storing and servicing equipment, and leased back to the operating company on arm's length terms. The property qualifies as business real property because its use is wholly and exclusively for the business. The same property would not qualify if a portion were converted to a residence for the business owner or a related party.

How the Limited Recourse Borrowing Arrangement works for commercial property

When an SMSF borrows to acquire property, the loan must be structured as a Limited Recourse Borrowing Arrangement under sections 67A and 67B of the SIS Act. The property is held in a separate holding trust, and the SMSF acquires a beneficial interest in the asset. Legal ownership transfers to the SMSF once the loan is repaid.

If the loan defaults, the lender's recourse is limited to the asset held in the holding trust. No other SMSF assets are at risk. Investment returns, including rental income from a related party lease, flow to the SMSF during the term of the loan.

From 10 August 2026, new LRBAs for real property can only be used to acquire business real property. The change does not affect commercial property purchases or existing residential LRBAs entered into before that date. SMSFs can still borrow to buy commercial property and lease it to a related party, provided the arrangement satisfies the business real property definition and all other compliance conditions.

The borrowed funds must be used to acquire a single asset. Multiple properties on separate titles cannot be purchased under one LRBA, even if they are substantially similar. Loan proceeds can cover acquisition costs such as stamp duty and establishment fees, but cannot be used to improve an existing SMSF asset or fund capital works after settlement.

Arm's length lease terms and in-house asset exemptions

Business real property leased to a related party of the fund is exempt from the in-house asset rules, but only if the lease is made on arm's length terms at market value. The exemption does not apply automatically because the property is classified as business real property. The lease itself must be genuine, documented, and reflect the terms an independent party would agree to in the same circumstances.

Arm's length terms include market rent, appropriate lease duration, documented rent reviews, and enforceable obligations on both parties. The ATO expects trustees to obtain an independent valuation to support the rental amount, particularly where the tenant is a related party. A lease at below-market rent may be assessed as non-arm's length income and taxed at 45 percent, rather than the concessional rate of 15 percent.

A tenant who is a related party must pay rent on time, maintain the property in accordance with the lease, and meet all other obligations as if they were unrelated to the fund. The trustee must enforce the lease terms, including pursuing arrears and addressing breaches. Allowing a related party tenant to default without consequence can result in a breach of the sole purpose test under section 62 of the SIS Act.

Safe harbour interest rates and refinancing compliance

Where an SMSF borrows from a related party to fund the property purchase, the loan must also satisfy arm's length conditions. The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5, updated annually. Loans that meet the safe harbour rate and other conditions set out in the guideline are considered compliant.

Income from a loan that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent. The safe harbour rate applies to both real property and listed securities and is relevant whether the loan commenced before or after the guideline was published.

Refinancing an existing SMSF loan to a new lender does not trigger the post-10 August 2026 restriction on residential property, provided the refinanced loan relates to the same asset and maintains the limited recourse character of the original arrangement. The refinanced loan must satisfy the same compliance conditions, including that it cannot be used to acquire a different asset or fund improvements to the existing property.

In the event of a default, the lender's recourse must remain limited to the property held in the holding trust. A related party may provide a personal guarantee to the external lender, but their recourse must also be limited to the asset under the arrangement, not to other SMSF assets.

Tax treatment of rental income and capital gains

Rental income received by the SMSF from a related party tenant is assessable income and taxed at 15 percent during the accumulation phase, provided the lease satisfies arm's length conditions. Where the fund has commenced a pension and the asset is a segregated current pension asset, the rental income may be exempt current pension income, subject to the fund's specific circumstances and whether an actuarial certificate is required.

Capital gains on the disposal of commercial property are subject to CGT in the same way as other fund assets. Where the property has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain during accumulation phase. The actual tax liability depends on the property's adjusted cost base, selling costs, capital improvements, and the fund's overall tax position.

Where the property supports a retirement-phase income stream and the fund's assets are fully segregated as current pension assets, the capital gain may be disregarded entirely. Where the fund uses the proportionate method, only the exempt proportion of the gain is disregarded, as determined by an actuarial certificate.

From 1 July 2026, Division 296 tax applies to members whose total superannuation balance exceeds $3 million. A capital gain must be realised through a CGT event to form part of Division 296 fund earnings. Rental income and realised gains may contribute to the calculation, but unrealised increases in property value do not. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes.

Sole purpose test and present-day benefit risks

Every SMSF investment, including commercial property held under an LRBA and leased to a related party, must be maintained for the sole purpose of providing retirement benefits to members. Section 62 of the SIS Act prohibits trustees from maintaining the fund for other purposes.

A lease arrangement that provides the member or their business with a present-day benefit beyond what an arm's length arrangement would deliver may contravene the sole purpose test. Allowing the business to occupy the property rent-free, deferring rent without commercial justification, or structuring the lease to favour the business over the fund are all compliance risks.

The test is whether the decision benefits the fund or the member. Trustees must act in the fund's interests, even where that conflicts with the immediate needs of the business. The ATO has the power to issue penalties, make the fund non-complying, and assess tax at the top marginal rate where a breach is identified.

Businesses in coastal areas such as San Remo, where commercial property stock is limited and rental demand from tourism and marine industries remains steady, may see long-term value in an SMSF-owned premises arrangement. The strategy works when the property is genuinely used for business purposes, the lease reflects market conditions, and the trustees treat the arrangement with the same rigour they would apply to an unrelated tenant.

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