Many business owners reach a point where they ask: why am I paying rent into someone else's pocket every month? If your premises are commercial or industrial, there is a lawful path to having your super fund own that building and lease it back to your business. The structure is well established, but the rules are specific and the ATO watches it closely.
What the Rules Actually Allow
The Superannuation Industry (Supervision) Act 1993 (SIS Act) contains a carve-out for what the ATO calls business real property (BRP). Per section 66(5) of the SIS Act, business real property is defined as real property, land and buildings, used wholly and exclusively in one or more businesses.
This carve-out matters for two reasons. First, business real property is an exception to the in-house assets and related party acquisition rules, meaning it can make up more than 5% of your fund and it can be acquired from your business. Second, once the fund owns the property, it can lease it back to a related party, including your own business, something that is generally prohibited for other assets.
According to ATO guidelines, whether a property qualifies as business real property depends on how it is actually being used, not merely its zoning or potential use. The business use must be the predominant use of the property at the time of acquisition and throughout the period of ownership within the SMSF.
A few other rules apply to the lease itself. Premises can be leased to a fund member, but you must follow specific rules and lease the property at market rates. To avoid non-arm's length income (NALI) issues, you should prepare and execute a formal written lease agreement with commercial terms. From 1 July 2025, trustees must provide additional documentation for any related party lease agreements. An independent valuation is also important: in practice, an independent market valuation is essential to demonstrate that the purchase price reflects fair value.
If the NALI rules are breached through a below-market lease or discounted fees, the consequences are severe. A specific expense relating directly to a particular asset, such as below market rent or discounted property management fees, can taint that asset for life, meaning all income and future capital gains relating to it may be taxed at 45% with no fix available.
The Tax Position Inside the Fund
This is where the structure becomes worth examining carefully. A complying SMSF pays concessional rates of tax that differ significantly from personal ownership.
- Accumulation phase: Rental income is taxed at 15%. Assets sold during accumulation phase are taxed at 15%. If the asset has been held for more than 12 months, a one-third discount applies, reducing the effective tax rate to 10%.
- Pension phase: Income and capital gains from pension assets are generally tax exempt. This applies only to the portion of the fund supporting the pension, and only up to the Transfer Balance Cap, which is $2 million for 2025-26 and is set to rise to $2.1 million from 1 July 2026.
The difference in outcomes at sale time can be significant. An SMSF selling a $1.5 million property that was purchased for $600,000, a $900,000 capital gain, in full pension phase pays zero CGT. The same sale in personal name would generate a taxable gain at the individual's marginal rate.
It is worth noting that recent CGT reforms changed the rules for individuals, trusts, and partnerships, but the final legislation explicitly excludes complying super funds from the new regime. The SMSF's one-third discount for assets held beyond 12 months has been retained.
The Costs and Trade-offs to Weigh
The structure has real costs and genuine risks that deserve honest consideration before anyone proceeds.
Borrowing costs. If the fund needs to borrow to acquire the property via a Limited Recourse Borrowing Arrangement (LRBA), the terms are stricter than a standard investment loan. While ATO regulations do not specify deposit amounts, SMSF lenders typically require larger deposits than standard loans due to the limited recourse nature. Loan-to-value ratios usually range from 70-80% for residential SMSF loans and 60-70% for commercial SMSF loans. In practice, expect to need a larger deposit of 25% or more, plus higher liquidity post-settlement. Because of this added risk for lenders, SMSF loans usually come with higher interest rates and lower maximum LVRs than regular home loans.
Related-party loan rates. If the fund borrows from a related party rather than a commercial lender, the ATO sets safe harbour interest rates under Practical Compliance Guideline PCG 2016/5. For the 2025-26 financial year, the safe harbour interest rate is 8.95% for LRBAs used to acquire real property. Rates are reviewed annually based on RBA indicator lending rates.
Fund liquidity. The fund must retain enough cash to service the loan, pay its own expenses, and meet pension payments if members are drawing an income stream. A property that ties up most of the fund's capital concentrates risk considerably.
Compliance overhead. The ATO announced stricter audit activity in April 2025 on SMSFs with related party arrangements. A complying SMSF is independently audited every year, and the auditor will look at how the property was acquired, whether any related-party lease is at a genuine market rate, and whether the borrowing is set up correctly.
A Worked Example
Consider a simplified illustration. The numbers below are for educational purposes only and are not a projection of any outcome.
A business owner runs a manufacturing business from a warehouse currently leased at $60,000 per year. The warehouse is valued at $800,000. Her SMSF has $400,000 in liquid assets. She structures an LRBA: the fund contributes $280,000 (35% deposit) and borrows $520,000 via an external lender. The warehouse is held in a bare trust during the loan term; the SMSF holds the beneficial interest.
The business signs a formal lease with the SMSF at independently appraised market rent. That $60,000 annual rental income flows into the fund and is taxed at 15% in accumulation phase, $9,000 in tax, leaving $51,000 net inside the fund each year. The rent is also a deductible business expense, as it would be with any landlord.
When the owner transitions to pension phase (within Transfer Balance Cap limits), the rental income and any eventual capital gain on the property become tax-free inside the fund. The same building that previously generated a rent bill for the business is now a retirement asset.
Note: this example does not include stamp duty, LRBA setup costs, legal fees, annual audit costs, or ongoing fund administration. Those costs are real and need to be factored into any analysis.
Four Things to Do Before You Proceed
- Verify BRP status. Confirm with an SMSF specialist accountant that your premises genuinely qualify as business real property under the SIS Act definition. Mixed-use properties or premises where part is used personally will need careful assessment.
- Get an independent valuation and rental appraisal. Both the purchase price and the lease rate must reflect arm's length market terms. This protects the fund from NALI exposure and satisfies the annual audit.
- Model the numbers with a licensed SMSF broker. The fund needs enough liquidity post-settlement to service the loan through vacancies and cover fund running costs. An SMSF-experienced broker can assess what the fund can realistically borrow and on what terms.
- Talk to a financial adviser about your overall position. Concentrating a large portion of super in a single illiquid asset is a portfolio decision with long-term implications. A licensed financial adviser can place it in context alongside your other retirement assets.
For more on how SMSF property works as part of a broader property strategy, visit our insights page or book a free call to talk through what the structure might look like for your situation.
General information only, not personal financial advice. Speak with a licensed adviser before acting.