Can My SMSF Buy Commercial Property and Lease It Back to My Business?

Yes, an SMSF can buy your business premises and lease it back to your own business. It is one of the more common SMSF strategies in Australia. It is also one of the easiest to get wrong, because the rules that make it legal are strict and the penalty for missing one is steep.

What Makes a Property "Business Real Property" in the ATO's Eyes?

The property has to be used wholly and exclusively in one or more businesses, generally land and buildings, not a residential investment with an incidental business use (SuperGuide). That classification is what makes the whole strategy legal.

Why Does That Classification Matter?

Business real property is exempt from two rules that would otherwise block this transaction outright: the related-party acquisition restrictions, which normally stop an SMSF buying an asset from a member, and the in-house asset rules, which cap how much of a fund's assets can be tied up with related parties (SuperGuide). Get the classification wrong and the whole purchase can breach the super laws, not just the lease.

What Has to Be True About the Lease?

• A registered commercial lease, not a handshake arrangement.
• Market rent, on typical commercial terms, reviewed like any other commercial tenancy.
• Rent collected in full and on time. No discounts, no deferrals, no "we'll catch up next quarter."
• If rent doesn't cover the fund's loan repayments, the shortfall has to come from the fund's own contributions, not from the business quietly absorbing it (SuperGuide).

The sole purpose test sits behind all of this: the fund's investment has to be for the benefit of members in retirement, not for the convenience of the business (SuperGuide).

Can the SMSF Borrow to Buy the Property?

Yes, through a Limited Recourse Borrowing Arrangement (LRBA). The structure has specific requirements:

• The property sits in a separate bare trust. The bare trustee cannot be the SMSF trustee.
• Borrowed funds can only be used to acquire a single asset, not to refinance or improve an existing fund property.
• Lenders commonly cap borrowing at 70% to 80% of the purchase price, so the fund needs real cash for the deposit and costs.
• Many lenders require personal guarantees from the fund's members, which means personal assets can be at risk if the fund can't repay the loan.

(SuperGuide)

What Does a Compliant Structure Actually Look Like?

Item

Amount

Property value

$900,000

LRBA loan (70% LVR)

$630,000

SMSF capital required (deposit plus costs)

$270,000+

Market rent (illustrative, ~7% gross yield)

$63,000 per year

Loan repayments (illustrative, interest-only at 7.5% p.a.)

$47,250 per year

Rental surplus before other fund costs

$15,750 per year

The surplus matters. A lease priced to just cover the loan, with nothing left over, leaves no buffer for a vacancy, a rate rise, or the fund's other running costs.

What Should You Check Before You Commit?

• Get the business real property classification confirmed in writing by your SMSF accountant or auditor before you sign anything.
• Have the lease drafted and registered by a lawyer who works with SMSFs specifically, not a generic commercial lease template.
• Model the loan on a higher interest rate than today's, so the structure still works if rates move.
• Keep the fund's bank account and the business's bank account genuinely separate. Rent goes in, loan repayments go out, nothing else.
• Get an independent market rent review at least every year or two, not just at the start of the lease.

Frequently Asked Questions

Can my SMSF buy my business premises and lease it back to my own business? Yes, provided the property qualifies as business real property under the ATO's rules, meaning it's used wholly and exclusively in a business. That classification exempts the purchase from the related-party acquisition restrictions and the in-house asset rules that would otherwise apply.

Does the SMSF have to charge my business market rent? Yes. The lease needs to be on arm's length, commercial terms: a registered lease, market rent, and rent collected in full and on time with no discounts, or the ATO can treat the arrangement as non-arm's length and tax the related income at 45%.

Can the SMSF borrow to buy the property? Yes, through a Limited Recourse Borrowing Arrangement (LRBA). The property is held in a separate bare trust, borrowed funds can only buy a single acquirable asset, and lenders commonly cap lending at 70% to 80% of the purchase price, so the fund still needs a substantial cash deposit.

What's the biggest risk in this structure? Treating the fund's property like it belongs to the business rather than the members. Any concession on rent, late payment, or use of borrowed money to improve the property outside the rules can trigger non-arm's length income taxed at 45%, well beyond the cost of simply paying market rent.

What Happens If the SMSF Breaches the Arm's-Length Rules?

A breach of the sole purpose test, the related-party acquisition rules or the non-arm's-length income (NALI) provisions is treated seriously by the ATO, because the concession the SMSF structure relies on is built on the fund acting as an independent landlord, not a convenient financing vehicle for the member's business.

The practical consequences escalate depending on severity. For a minor, inadvertent breach (rent paid a few days late, a lease renewal not formally documented), the ATO's usual first response through an SMSF auditor is a rectification direction: fix the paperwork, backdate the market rent review, and document it properly going forward. For a more serious or repeated breach, the fund can be made non-complying, which is the single most damaging outcome in the SMSF system: the fund's assets are taxed at the top marginal rate in the year it becomes non-complying, effectively wiping out a large share of the fund's value in one assessment. Non-arm's-length income, such as rent set below market to benefit the member's business, is taxed at 45% rather than the usual concessional superannuation rates, and that tax applies to the income itself, not just the shortfall.

There is also a personal exposure angle. Trustees (the members, acting as individual trustees or directors of a corporate trustee) can face administrative penalties from the ATO personally, separate from what happens to the fund, if they are found to have caused the breach through a related-party dealing that was not at arm's length.

This is why the specialist review flagged in the checklist below matters more here than in most SMSF strategies. The arrangement is legal and common, but it rewards getting every detail right and punishes shortcuts disproportionately.

Can the SMSF Later Sell the Property Back to a Member?

Yes, and in practice many of these arrangements are eventually unwound this way, often when the member wants to retire and access the property personally, or when the fund needs to rebalance its asset allocation. A related-party sale out of an SMSF is permitted, but it still has to happen on arm's-length terms: an independent valuation sets the sale price, and the transaction needs to be properly documented like any other related-party dealing.

Timing matters for two separate reasons. First, if the property has appreciated, the fund (and ultimately the members, through their balances) may face capital gains tax on the sale, discounted if the fund has held the asset for the required period, but still a real cost to factor into the exit plan. Second, if the LRBA loan hasn't been fully repaid, the loan needs to be cleared as part of the sale, which usually means the member buying the property personally needs their own finance in place, essentially swapping an SMSF borrowing arrangement for a standard commercial or residential investment loan in their own name.

Some members plan for this from the start by structuring the lease term and loan repayments so the LRBA is close to paid out by the time they expect to want the property back, which keeps the eventual sale simpler and avoids refinancing two debts at once.

How Does This Compare With Just Buying the Property Personally?

It's worth asking, before committing to the SMSF route, whether buying the premises outside super achieves the same goal with less structural complexity. Buying personally (or through a separate company or trust) avoids the sole purpose test, the related-party lease rules and the NALI exposure entirely, because there's no superannuation concession to protect. You can also negotiate lease terms more flexibly with yourself, since there's no independent trustee duty to a fund.

The trade-off is tax and asset protection. Rental income inside an SMSF is taxed at the concessional 15% rate (or tax-free once the fund is in pension phase), against the member's marginal rate, which can be well above 30%, if held personally. Property inside super also sits outside the member's personal estate for some creditor-protection purposes, which can matter if the operating business carries meaningful risk.

Which answer is right depends heavily on the member's age, how close they are to retirement, their marginal tax rate, and how much of their total super balance the property purchase would represent (concentration risk inside the fund is a real consideration the regulator and most advisers will raise). This is a comparison worth running with a licensed financial adviser or your accountant before committing capital, not a decision to make on tax efficiency alone.

What Does This Cost to Set Up and Run Each Year?

Beyond the loan itself, an LRBA and bare trust structure carries ongoing costs that are worth budgeting for alongside the usual SMSF running costs. Establishing the bare trust and loan documentation typically involves legal fees, and the annual audit, already required for every SMSF, becomes more involved (and usually more expensive) once the fund holds property and a related-party lease, because the auditor has to specifically test market rent, lease compliance and the LRBA structure each year, not just review investment statements. Ongoing accounting and SMSF administration fees also tend to be higher for a fund holding direct property than one holding only listed shares or managed funds, simply because there's more to document and more that can go wrong. These costs don't change the fundamental merits of the strategy, but they're real, recurring numbers worth including when comparing the net benefit against simply buying the property outside super.

This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not tax, legal or SMSF advice. Speak with a TransformBiz adviser and your SMSF auditor or accountant before acting on anything here.

Sources: SuperGuide, SMSFs commercial property and borrowing

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