Proven Tips to Navigate SMSF Business Property Rules

If you run a business and want to use your super fund to buy the premises you operate from, the sole purpose test becomes the line you cannot cross.

The sole purpose test requires that your SMSF is maintained only for the purpose of providing retirement benefits to members or their dependants. Every decision you make as a trustee needs to satisfy this test. Buying commercial property that your business leases from the fund can comply, but only if the arrangement is structured properly and the property meets strict definitions under the law.

What Qualifies as Business Real Property Under an SMSF

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the fund itself. Your operating company can lease the property from your SMSF, provided the lease is at market rent and on arm's length terms. If the property contains a dwelling for private or domestic purposes, it can still qualify if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private.

Consider a builder who operates from a warehouse with an attached office and small caretaker's residence. The property could qualify as business real property if the warehouse and office represent the main use. The same property would not qualify if the residence were the dominant feature and the workshop were incidental.

The 2026 Residential LRBA Ban and What It Means for Commercial Borrowing

From approximately 10 August 2026, SMSF loans using a limited recourse borrowing arrangement can only be used to acquire business real property. Residential property no longer qualifies for new borrowing arrangements, regardless of whether the property is newly constructed or an existing dwelling. The ban applies to all residential investment property purchased under an LRBA from that date.

Commercial property that satisfies the business real property definition is not affected. If you are purchasing a workshop, retail premises, or office building that is used wholly and exclusively in a business, the LRBA structure remains available. The property cannot have a mixed use where the main purpose is domestic or private.

How the Sole Purpose Test Applies When You Lease Property to Your Own Business

Your SMSF can acquire business real property and lease it to a related party, including a company you control, without breaching the in-house asset rules or the sole purpose test. The lease must be made on arm's length terms at market value. If the rent is below market or the lease terms favour the tenant in a way that disadvantages the fund, the arrangement may not satisfy the sole purpose test.

In our experience, the most common issue arises when rent is set too low or when maintenance obligations are shifted to the fund in a way that would not occur in a commercial lease. The ATO will examine whether the fund is being maintained to provide retirement benefits or to subsidise the business.

Borrowing Restrictions and the Single Asset Rule

Under a limited recourse borrowing arrangement, the borrowed money must be used to acquire a single asset or a collection of identical assets that can be treated as a single asset. Multiple real property titles cannot be acquired under a single LRBA unless the properties are identifiable as a single asset, meaning they have equal market value and are bought and sold together. Properties on separate titles do not qualify even if they are adjacent or substantially similar.

Borrowed funds cannot be used to improve an existing asset. If you want to buy a commercial building and renovate it, the renovation must be funded from existing SMSF assets, not from the loan. An existing fund asset cannot be placed into an LRBA. Drawdowns for capital improvements are not permitted for arrangements entered into on or after 7 July 2010.

Refinancing an SMSF Commercial Loan Without Triggering a New Arrangement

Refinancing an existing SMSF loan is permitted, but the ATO has long held that a significant change to the terms or conditions of an LRBA ends the arrangement and creates a new one. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement.

As at 2 July 2026, the ATO had not published updated guidance on how the 2026 residential ban applies to refinancing. If you hold a grandfathered residential LRBA entered into before approximately 10 August 2026, any refinancing that creates a new arrangement after that date would be caught by the ban. For commercial property, refinancing remains available provided the refinanced loan relates to the same single asset, maintains the limited recourse character, and meets arm's length terms.

Arm's Length Terms and Safe Harbour Interest Rates

The ATO publishes safe harbour interest rates for SMSF borrowing arrangements under Practical Compliance Guideline PCG 2016/5. These rates are updated annually and apply to both real property and listed securities held under an LRBA. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate.

In the event of a default, recourse of the lender against the SMSF trustees must be limited to the asset being acquired under the arrangement. A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement and not any other SMSF assets. If you are borrowing from a related party, the interest rate and loan terms must reflect what an independent lender would charge in the same circumstances.

Division 296 Tax and Total Superannuation Balance Considerations

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent Division 296 tax applies to the proportion of earnings above that threshold. 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.

If you are considering an SMSF commercial loan and your balance is approaching the thresholds, the inclusion of the outstanding loan amount in your total superannuation balance may affect your exposure to Division 296 tax. The calculation depends on when the LRBA was entered into and whether it is with a related party.

Buying commercial property through your SMSF can work if the property qualifies as business real property and the arrangement satisfies the sole purpose test. The structure needs to reflect a genuine investment for retirement purposes, not a way to fund your business at the expense of your super. Call one of our team or book an appointment at a time that works for you.

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