What are SMSF Loans for Leasing to Your Business

Your Self-Managed Super Fund can buy a commercial building and lease it back to your own business, creating a rental income stream for retirement while your business operates from property the fund owns.

For business owners in Young running a practice, retail shopfront, or service business out of leased premises, this arrangement shifts rent payments from an external landlord into your own super fund. The fund receives rental income taxed at 15 percent during accumulation phase, and your business operates from a property that will eventually support your retirement income.

How SMSF Commercial Property Loans Work Under the 2026 Rules

SMSFs can still borrow to buy commercial property through a Limited Recourse Borrowing Arrangement, even after the changes that took effect in August this year. The new rules restrict borrowing for residential property but leave commercial property purchases unchanged, provided the property meets the business real property definition under section 66 of the SIS Act.

The loan must be set up so the property is held in a bare trust until the borrowing is repaid. If the loan defaults, the lender's recourse is limited to the property itself, not other assets in the fund. Investment returns flow to the SMSF during the loan term. Once the loan is fully repaid, legal ownership transfers from the holding trust to the SMSF trustee.

Consider a scenario where a veterinarian in Young operates from leased consulting rooms on Boorowa Street. She pays $42,000 annually in rent to an external landlord. Her SMSF has $280,000 in accumulated super, and she arranges an SMSF loan with a 30 percent deposit to purchase a $400,000 commercial premises nearby. The fund borrows $280,000 through an LRBA, her business signs a lease with the SMSF at market rent of $40,000 per year, and the rent paid by the business becomes assessable income in the fund, taxed at 15 percent. Loan repayments reduce the LRBA balance over time, and once the debt is cleared, the fund owns the property outright.

Business Real Property Must Be Used Wholly and Exclusively

The property must be used wholly and exclusively in one or more businesses to qualify as business real property. Whether a property satisfies this definition depends on its actual use at the time of acquisition, not how it is marketed or zoned.

A commercial shopfront on the main street of Young leased to a retail tenant would generally qualify. A property with a residential flat above a shop may not, unless the residential component is incidental and the main use remains commercial. Mixed-use properties require individual assessment based on the nature and actual use of the building. A property marketed as commercial but used partly for private purposes will not meet the definition.

The business using the property does not need to be carried on by the SMSF or the entity holding the interest in the property. This allows an SMSF to buy commercial premises and lease it to a related party business, such as a company or trust controlled by the fund members.

Leasing Commercial Property Back to Your Own Business

An SMSF can lease business real property to a related party, including a company or trust that the SMSF members control, without the property being classified as an in-house asset. The lease must be on arm's length terms at market value.

Arm's length terms means the rent charged, lease duration, and other conditions must reflect what would apply in a commercial lease between unrelated parties. The rent should be supported by a valuation or comparable rental evidence from the local market. A lease that charges below-market rent or includes favourable terms not available in the broader market may breach the arm's length requirement and expose the trustees to compliance issues.

In a scenario where a Young-based accounting practice operates through a family trust and the members' SMSF buys the office building, the trust enters a formal lease with the SMSF. The lease specifies rent of $38,000 per year based on comparable commercial leases in Young, includes standard outgoings clauses, and sets a three-year term with an option to renew. The trust pays rent monthly, the SMSF reports the rental income in its annual return, and the arrangement is documented and reviewed annually to confirm it remains at market value.

Deposit Requirements and Loan Terms for Commercial SMSF Loans

Lenders offering commercial loans to SMSFs typically require a deposit of 30 to 40 percent of the purchase price. Loan-to-value ratios for commercial SMSF property are lower than for residential lending due to the limited recourse structure and the nature of commercial property valuations.

Interest rates on SMSF commercial loans tend to be higher than standard investment loans or owner-occupier home loans. Rates are generally structured as variable, though some lenders offer fixed rate options for a set period. Loan terms are often capped at 15 years, shorter than residential SMSF loans, reflecting the lender's assessment of risk and the income-producing nature of the asset.

The SMSF must demonstrate it can service the loan from rental income, contributions, or other fund income. Lenders assess the fund's cash flow, the member's capacity to make ongoing contributions if required, and the strength of the lease arrangement if the property will be tenanted by a related party.

Tax Treatment of Rental Income and Capital Gains in the Fund

Rental income received by the SMSF is taxed at 15 percent during accumulation phase. Deductions are available for loan interest, property management, repairs, rates, insurance, and other allowable expenses. Depreciation on building fixtures and capital works deductions may also apply depending on the age and construction history of the property.

If the SMSF sells the commercial property after holding it for at least 12 months, a one-third capital gains tax discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's cost base, selling costs, capital improvements, any capital losses available to offset, and the fund's overall tax position for that year.

Where the SMSF has commenced a pension and the property is supporting a retirement-phase income stream, the fund may qualify for exempt current pension income. In a fully segregated pension fund, capital gains on disposal may be entirely tax-free. Where the fund has both accumulation and pension interests, the exemption applies proportionally based on the actuarial percentage or the segregated method, depending on the fund's circumstances.

Sole Purpose Test and Related Party Benefits

All SMSF investments must satisfy the sole purpose test under section 62 of the SIS Act, meaning the fund is maintained solely to provide retirement benefits to members. Any decision that gives members or related parties a present-day benefit outside of retirement may breach this requirement.

Leasing commercial property to a related party business is permitted, but the arrangement must be structured to benefit the fund, not to provide the business with a rental subsidy or other advantage. The rent must reflect market value, the lease must include appropriate terms, and the property must be maintained as an investment asset of the fund. Using the property for private purposes, allowing the business to defer rent payments without commercial justification, or entering lease terms that disadvantage the fund would raise compliance concerns.

Trustees should document the rationale for the investment, obtain independent valuations where appropriate, and review the arrangement regularly with their SMSF specialist and accountant to confirm ongoing compliance with superannuation law.

What Happens When You Refinance an Existing SMSF Commercial Loan

Refinancing an existing SMSF commercial loan is not affected by the changes that took effect in August. You can refinance to another lender or renegotiate terms with your current lender, provided the refinanced loan relates to the same property, maintains the limited recourse structure, and meets arm's length terms.

The ATO considers refinancing to mean entering a new loan contract for the same asset. The refinanced loan must comply with all LRBA conditions, including that the borrowed funds are used to acquire the same single asset originally purchased under the arrangement. The holding trust structure remains in place until the refinanced loan is fully repaid.

Interest rates on refinanced SMSF loans must meet the safe harbour rates published by the ATO under Practical Compliance Guideline PCG 2016/5, updated annually. A loan that does not meet arm's length terms may result in income being assessed as non-arm's length income and taxed at 45 percent. Where you are refinancing an SMSF loan with a related party lender, the rate and terms must be documented and reviewed to confirm they align with commercial lending standards.

Your SMSF can use a commercial property loan to build wealth inside super while your business benefits from secure premises. Call one of our team or book an appointment at a time that works for you.

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