Unlock the Secrets to Leasing Commercial Property Back

Your Self-Managed Super Fund can purchase the commercial property your business operates from, then lease it back to that business.

The arrangement lets you convert rent expense into super contributions over time while holding a property your business already occupies. The legislative framework permits it provided the property meets the business real property definition under section 66 of the SIS Act and the lease operates on arm's length terms. Queensland businesses use this structure to secure premises in precinct-level commercial zones across Brisbane, the Gold Coast, Sunshine Coast, and regional centres, particularly for warehouses, offices, and retail shopfronts.

Business Real Property Must Satisfy the Definition

The property must be used wholly and exclusively in one or more businesses. Land and buildings qualify where the actual use at acquisition is business use only. A retail shopfront in Fortitude Valley or a warehouse in Yatala meets the definition if used entirely for business operations. A property marketed as commercial does not automatically qualify. SMSFR 2009/1 provides detailed guidance on how the ATO assesses use.

Mixed-use properties fail the wholly and exclusively test unless they fall within a narrow concession for primary production properties. If your business operates from a property that includes a residential component, you may not be able to use an SMSF commercial loan for the entire asset. The exception for dwellings on primary production land applies only where the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private.

Structuring the Loan Through a Limited Recourse Borrowing Arrangement

The SMSF borrows under a limited recourse borrowing arrangement where the lender's rights are limited to the property held in a bare trust. The SMSF trustee holds a beneficial interest in the property, and the legal title transfers once the loan is repaid. The trustee cannot use borrowed funds to improve the asset. If your business requires capital works, the SMSF must fund those improvements from other cash or contributions after the property is acquired. Lenders structure SMSF commercial loans with LVRs typically at 60% to 70% depending on the property location, lease terms, and whether the lease is to a related party.

Consider a director who operates a fabrication business from a 600-square-metre industrial unit in Brendale. The property is valued at $850,000, the business holds a standard commercial lease, and the director's SMSF has $400,000 in cash. The SMSF borrows $450,000 under a limited recourse arrangement, acquires the property through a bare trust, then leases it back to the fabrication business at market rent. The lease is documented at arm's length and reviewed by an independent valuer. Rental income flows into the SMSF and is taxed at 15%. The business pays rent instead of paying it to an unrelated landlord, and the director's super balance grows as the loan is repaid.

Arm's Length Lease Terms Are Mandatory

The lease between the SMSF and your related party business must be on arm's length terms at market value. Market rent must be determined by reference to comparable properties in the same precinct. Lease documentation should reflect standard commercial terms including rent review clauses, outgoings responsibilities, and maintenance obligations. An independent valuation supports the rent determination and protects the trustee from compliance risk. The ATO treats below-market leases as contraventions of the sole purpose test under section 62 of the SIS Act.

Tax Treatment of Rental Income and Capital Gains

Rental income received by the SMSF is taxed at 15% during accumulation phase. If a member is in pension phase, the rental income may be tax-free depending on the proportion of the fund in pension mode. The SMSF is entitled to claim deductions for loan interest, property management, insurance, rates, and other allowable expenses. Capital gains on disposal of commercial property held for more than 12 months receive a one-third discount in the accumulation phase, reducing the effective rate to 10%. Properties held in pension phase may qualify for full CGT exemption.

Consider an SMSF that acquired a commercial property in Maroochydore for $700,000 under a limited recourse borrowing arrangement. The property was leased to the member's accounting practice at $50,000 per annum. After loan interest, rates, and insurance, the SMSF retained net rental income of $22,000 per annum, taxed at 15%. Over ten years, the loan was repaid and the property value increased to $950,000. On disposal, the SMSF paid CGT of $25,000 after applying the one-third discount, retaining the balance as a retirement benefit.

Loan Requirements and Lender Appetite for Related Party Leases

Lenders assess related party leases with closer scrutiny than leases to unrelated tenants. The lease term, rental evidence, and tenant covenant all influence the LVR and rate offered. Most lenders require a formal lease agreement with a minimum three-year term, independent rental valuation, and evidence that the business can service the lease from trading income. Some lenders cap LVRs at 60% where the tenant is a related party. Variable rate products and fixed rate products are both available, though fixed rate terms are typically shorter for SMSF commercial property than for standard commercial loans. An SMSF commercial property broker can compare lenders and identify those with appetite for related party structures in Queensland.

Properties on Multiple Titles Cannot Be Acquired in One LRBA

Multiple real property titles cannot be acquired under a single limited recourse borrowing arrangement. The legislation requires a single acquirable asset. An exception applies where the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together. Two adjoining industrial units on separate titles do not satisfy the exception unless they are marketed, valued, and transacted as one property. If your business operates across two titles, you will need separate LRBAs or you will need to consolidate the titles before acquisition.

Sole Purpose Test and Present-Day Benefits

All decisions relating to the SMSF investment must be made for the sole purpose of providing retirement benefits. The property cannot be used to provide a present-day benefit to members or related parties. A lease at below-market rent, deferred maintenance that benefits the tenant, or capital improvements funded by borrowed money all risk contravening section 62. Trustees should document decisions, obtain independent advice, and ensure that every lease review and property decision reflects market terms.

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