Top tips to lease commercial property back to your business

Buying a commercial property through your Self-Managed Super Fund and leasing it back to your operating company is one of the few genuinely useful related-party arrangements still permitted under superannuation law.

The concept works because business real property is carved out from both the in-house asset rules and the usual related-party acquisition restrictions. Your fund can buy the property, your business can lease it, and rental income flows into a concessional tax environment. But only if you meet every condition in the definition and structure the arrangement on arm's length terms.

What Qualifies as Business Real Property Under Section 66

Business real property must be land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be yours, but if your operating company is the tenant, the use must be entirely commercial from day one. A property that contains any private or domestic dwelling can still qualify, provided the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private. Whether something qualifies is a question of actual use at the time of acquisition, not intended use later.

Consider a Canterbury-based manufacturing business operating from a leased industrial unit in Camberwell. The director's SMSF purchases the premises using a Limited Recourse Borrowing Arrangement, then leases the property back to the operating company. The property qualifies because it's used wholly for warehousing and light manufacturing. Rental income is taxed at 15 percent in the fund during accumulation, and potentially zero in pension phase. The business pays rent at market value, which is deductible. The SMSF holds an appreciating asset funded partly by the business it supports.

How the 2026 Residential Ban Protects Commercial LRBAs

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 prohibits new limited recourse borrowing arrangements for residential property from approximately 10 August 2026. Business real property is explicitly excluded from that prohibition. SMSF commercial loans over property that satisfies the section 66 definition remain available, and the compliance framework has not changed. The same single asset rule applies, the same limited recourse structure is required, and borrowed funds still cannot be used to improve an existing asset.

Vacant land, mixed-use properties where the main use is domestic, and properties not currently used in a business do not qualify. If your fund acquires something that looks commercial but fails the wholly and exclusively test, it's treated as an in-house asset. Where in-house assets exceed 5 percent of the fund's total assets at market value, the fund is non-compliant and the trustees must prepare a written plan to dispose of the excess within 12 months.

Setting the Lease on Arm's Length Terms

Any lease between your SMSF and a related party must be made on arm's length terms at market value. Practical Compliance Guideline PCG 2016/5 sets safe harbour terms for SMSF limited recourse borrowing arrangements, including guidance on what constitutes an arm's length rental arrangement. The ATO expects rent to reflect what an independent tenant would pay for comparable premises in the same location. An artificially low rent to assist the business exposes the fund to penalty tax. An artificially high rent with no commercial justification could be challenged as non-arm's length income, taxed at the top marginal rate.

You'll need a formal lease agreement, ideally prepared by a solicitor familiar with commercial leases and superannuation law. The lease should specify rent, outgoings, term, renewal options, and maintenance obligations. Rent reviews should be documented and conducted according to the lease terms. The trustee's duty is to the fund, not the business. That means enforcing the lease if rent falls into arrears, even if the tenant is your own company.

How Refinancing Works After the Residential Ban

Refinancing a commercial LRBA is not affected by the 2026 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. As at 2 July 2026, the ATO had not published updated guidance on all aspects of the new law, but the existing position remains that a significant change to the terms or beneficiaries of an LRBA ends the arrangement and creates a new one. SMSF loan refinance that switches lenders without changing the asset, the beneficial ownership structure, or the fundamental loan terms is generally treated as maintaining the existing arrangement.

If you're considering refinancing, confirm that the new lender's documentation preserves the limited recourse nature of the loan and that any offset account attached to the arrangement is a genuine offset offered by an authorised deposit-taking institution. Related party guarantees are permitted, but recourse under the guarantee must also be limited to the asset under the arrangement, not to other fund assets.

Division 296 Tax and Total Superannuation Balance

From 1 July 2026, members with a total superannuation balance above $3 million at the end of the financial year are subject to Division 296 tax of 15 percent on the proportion of earnings attributable to the amount above that threshold. A second tier applies at $10 million. 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.

If you're approaching the threshold and your fund holds a commercial property under an LRBA with a related-party lender, the outstanding loan amount could be included in your balance. That inclusion doesn't make the arrangement non-compliant, but it does affect your exposure to the additional tax. Members in that position should model the impact with their accountant before refinancing or making further contributions.

What Happens If the Property Use Changes

Business real property status depends on actual use, not title or intent. If your operating company vacates the premises and the property is leased to an unrelated tenant for a different commercial use, it remains business real property provided the new use is wholly and exclusively in a business. If the property becomes vacant or is converted to a use that doesn't satisfy section 66, it loses its business real property status and becomes an in-house asset if held by a related party or acquired from a related party.

Once an asset is classified as in-house, the 5 percent limit applies. The trustee must obtain a market valuation, determine whether the fund is over the limit, and if so, prepare a written plan to rectify the position within 12 months. The property doesn't need to be sold immediately, but the plan must demonstrate how the breach will be remedied. A return to compliant use may restore business real property status, but the compliance breach during the period of non-compliant use is not unwound retrospectively.

Call one of our team or book an appointment at a time that works for you. We'll walk through the structure, the lender requirements, and whether a commercial LRBA makes sense for your fund and your business.

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