How to lease your commercial property back to your business

From 10 August 2026, self-managed super funds can no longer borrow to buy residential property, but commercial property LRBAs remain unaffected by the changes. For business owners in Parramatta's commercial precincts along Church Street or near Westfield, this creates an opportunity to build wealth inside super while reducing operating costs in the business.

What the August 2026 Changes Mean for Commercial Property

LRBAs for commercial property that satisfies the business real property definition under section 66 of the SIS Act are not affected by the changes commencing 10 August 2026. Your SMSF can still borrow to acquire a commercial premises and lease it back to your related business, provided the property is used wholly and exclusively in one or more businesses. Whether a property satisfies the definition depends on its actual use at the time of acquisition and is a question of fact.

Consider a Parramatta-based physiotherapy practice operating from a leased premises on George Street. The business owner's SMSF could acquire a suitable commercial unit using a Limited Recourse Borrowing Arrangement, then lease the property back to the practice at market rent. The rent paid by the business becomes a tax deduction at the company tax rate, while the SMSF receives rental income taxed at 15 percent during accumulation phase or potentially tax-free in pension phase.

Business Real Property Must Be Used Wholly and Exclusively

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The business using the property does not need to be the entity that owns it. An accounting firm, dental clinic, warehouse, or retail shopfront can all qualify, but the property must be used for business purposes at the time your SMSF acquires it.

A property marketed as commercial does not automatically meet the definition. If you are considering a mixed-use property with both commercial and residential components, the residential portion may disqualify the entire asset unless specific exemptions apply. A concession exists for certain primary production property under which a dwelling occupying no more than 2 hectares does not cause the property to fail the wholly and exclusively test, provided the main use of the whole property is not domestic or private. This concession does not extend to standard commercial premises with an attached residence.

The In-House Asset Exemption for Related Party Leasing

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. This exemption allows your SMSF to lease commercial property to your company or business without triggering the 5 percent in-house asset limit that applies to other related party transactions. The lease must be made on arm's length terms at market value.

In our experience, one area where business owners underestimate complexity is determining market rent. A lease agreement between your SMSF and your business needs to reflect what an independent tenant would pay for comparable premises in the same location. In Parramatta's Auto Alley precinct, for instance, workshop rents differ significantly from office rents in the CBD core. Obtain a rental appraisal from a licensed commercial valuer before finalising the lease, and review the rent annually to maintain compliance.

How Rental Income and Capital Gains Are Taxed Inside Your SMSF

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Rental income received from your related business is included in the fund's assessable income and taxed at this rate during accumulation phase. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain.

If your SMSF moves into pension phase and the commercial property supports a retirement-phase income stream, rental income and capital gains may become exempt from tax under the exempt current pension income provisions. The extent of the exemption depends on whether the fund's assets are fully segregated as pension assets or whether the proportionate method applies. Funds with both accumulation and pension interests will receive only a partial exemption based on an actuarial certificate.

Borrowing Limits and Deposit Requirements for Commercial SMSF Loans

Most lenders offering SMSF loans for commercial property will require a deposit of at least 30 to 40 percent of the purchase price, though some lenders may lend up to 70 percent LVR depending on the property type, location, and tenant profile. A property leased to your own business is considered higher risk by lenders compared to one leased to an unrelated tenant, which may result in a lower maximum LVR or a higher loan interest rate.

Commercial SMSF property loans are typically structured with variable rates or fixed terms of one to five years. Unlike owner-occupied home loans, commercial SMSF loans are assessed based on rental income serviceability rather than personal income. The lender will consider the lease term, tenant strength, property location, and the SMSF's ability to service the loan from rental income and any additional contributions.

Setting Up the Limited Recourse Borrowing Arrangement

Under an LRBA, the asset is held in a separate holding trust, the SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. If the loan defaults, only the asset held in trust is at risk. The lender's recourse is limited to that single asset and does not extend to other SMSF assets.

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. You cannot acquire multiple commercial properties under a single LRBA unless they are distinctly identifiable as a single asset. Borrowed funds can cover the purchase price, loan establishment costs, and stamp duty, but cannot be used to improve an existing asset or fund renovations after settlement.

The holding trust is usually a bare trust established specifically for the LRBA. The SMSF trustee holds the beneficial interest, and legal title transfers to the SMSF once the loan is repaid. Your SMSF specialist and legal adviser will prepare the trust deed, loan agreement, and lease documentation to ensure compliance with superannuation law.

Refinancing an Existing Commercial LRBA

Refinancing of commercial LRBA arrangements is not affected by the 2026 changes. If your SMSF already holds a commercial property under an LRBA and you want to refinance to a different lender or access current variable rates, you can do so without triggering the post-commencement restrictions that now apply to residential property. The refinanced loan must relate to the same single asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms.

The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5, updated annually, applying to both real property and listed securities. If your SMSF borrows from a related party rather than a commercial lender, the interest rate charged must align with these safe harbour rates to avoid the income being treated as non-arm's length income and taxed at 45 percent. Working with an SMSF mortgage broker helps confirm your loan terms meet compliance requirements before settlement.

Division 296 Tax and Commercial Property Held in Your SMSF

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. A capital gain must be realised through a CGT event for it to form part of the fund's assessable income and therefore the Division 296 earnings base. Rental income and realised capital gains may contribute to the calculation, but an unrealised increase in property value does not.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. If your SMSF holds a commercial property valued at $800,000 with an outstanding loan of $400,000, only the net equity of $400,000 is included in your total superannuation balance. This treatment recognises that borrowed funds are not member contributions and do not represent the member's accumulated retirement benefit.

If you are approaching or above the $3 million threshold, speak with your SMSF accountant about whether to make the cost base uplift election by the due date of the 2026-27 SMSF annual return. This election adjusts the cost base of CGT assets to market value as at 30 June 2026 and applies to all CGT assets held directly by the SMSF at that date.

Maintaining Compliance with the Sole Purpose Test

All SMSF investments, including commercial property held under an LRBA, must be maintained at all times for the sole purpose of providing retirement benefits for SMSF members. Leasing commercial property to your related business is permitted, but the arrangement must be structured to benefit the fund, not to provide a present-day advantage to you or your business at the fund's expense.

Rent must be set at market rates and paid on time. Allowing your business to occupy the property rent-free or below market rent could breach the sole purpose test. Similarly, if the property requires significant capital works, those costs must be funded from the SMSF's cash reserves or member contributions, not through borrowing. The prohibition on using borrowed funds to improve an existing asset applies throughout the life of the LRBA.

If your business circumstances change and the property is no longer suitable, the SMSF can lease to an unrelated tenant or sell the property, subject to the usual CGT and compliance considerations. Decisions should always be made in the context of the fund's retirement purpose, not short-term business needs.

Buying commercial property through your SMSF and leasing it to your business can build equity inside a tax-effective structure while giving your business security of tenure. The strategy requires careful structuring, professional advice, and ongoing compliance, but for the right business owner in the right circumstances, it can form a central part of retirement planning. Call one of our team or book an appointment at a time that works for you to discuss whether a commercial SMSF loan aligns with your goals and how to structure the arrangement correctly from the start.

Frequently Asked Questions