What are SMSF Loans for Leasing Back to Your Business?

What is an SMSF Commercial Loan?

An SMSF commercial loan lets your super fund borrow money to buy business real property that can be leased back to a related party, including your own business. The property sits in a separate trust until the loan is repaid. If the loan defaults, only that property is at risk, not your other super assets.

This arrangement works under a Limited Recourse Borrowing Arrangement. Your fund gets the rental income. Your business pays rent at market rates. Your super balance grows while you access commercial premises without tying up cash outside super. Recent changes to residential SMSF borrowing have made commercial property the remaining option for anyone looking to borrow within their fund.

What Counts as Business Real Property?

Business real property must be used wholly and exclusively in one or more businesses. That definition comes from section 66 of the SIS Act and determines whether your property qualifies for the related party lease exemption.

A workshop leased to your own labour hire company would qualify. An office leased to a business you own would qualify. A storage facility leased to a logistics operation would qualify. The property does not have to be large or expensive. What matters is how it is actually used when you buy it, not what the real estate agent calls it. A property zoned commercial but used for private storage does not meet the definition.

Mixed-use properties require careful assessment. A shed with an attached residential flat may not qualify as business real property unless you can prove the dwelling is incidental to the primary production use and occupies less than 2 hectares. That concession is specific to primary production and does not apply to general commercial operations.

Why Leasing Back to Your Related Business Works

When your SMSF owns business real property and leases it to a related party, the lease does not breach the in-house asset rules. The property must be leased at market rent, and the lease terms must reflect what an unrelated party would accept.

Consider a fixed plant operator who runs a side business maintaining and hiring out plant equipment. The operator sets up an SMSF, borrows to buy a workshop and yard through a Limited Recourse Borrowing Arrangement, then leases the property back to the business. The business pays $30,000 rent per year at market rates. That rent is deductible to the business and flows into the super fund as income taxed at 15 percent during accumulation phase. The business gets access to premises without a large upfront capital outlay. The fund builds equity in an appreciating asset.

The arrangement must be documented properly. The lease must be in writing, at arm's length, and reviewed regularly to confirm the rent remains at market rates. If the rent is not at market rates, the income may be assessed as non-arm's length income and taxed at 45 percent.

How the Borrowing Arrangement is Structured

The SMSF does not hold legal title to the property while the loan is outstanding. Legal title sits in a bare trust, also called a holding trust. Your fund holds the beneficial interest and receives the rental income. Once the loan is repaid, legal title transfers to the fund.

The borrowed funds must be used to acquire a single asset. You cannot borrow under one arrangement to buy multiple properties on separate titles. Loan establishment costs and stamp duty can be covered by the borrowed amount, but you cannot use borrowed funds to improve the property after purchase. Any capital improvements must be funded from the super fund's own cash reserves.

The loan must be limited recourse. If the arrangement defaults, the lender can only pursue the asset held in the bare trust. They cannot touch other assets in your super fund. A related party can provide a personal guarantee to help you secure finance, but that guarantee must also be limited to the asset being acquired.

SMSF Loan Interest Rates and LVR Limits

Lenders offering SMSF commercial loans typically lend up to 70 percent of the property value, meaning you need a 30 percent deposit from within the fund. Rates are higher than standard commercial loans and usually sit around 1 to 2 percent above standard variable rates for owner-occupied housing.

The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5. If your loan sits within those rates, the ATO accepts the arrangement as arm's length. If your rate is outside the safe harbour range, you need to justify it as consistent with what an unrelated lender would charge in similar circumstances.

Your borrowing capacity depends on the rental income the property will generate, not your personal income. Lenders assess whether the rent will cover the loan repayments with a buffer. If the property cannot service the loan from its own income, the arrangement will not proceed.

Tax Treatment of Rental Income and Capital Gains

Rental income received by your SMSF is taxed at 15 percent during accumulation phase. Deductions for loan interest, property management, insurance, rates, and repairs reduce the taxable income. If your fund is in pension phase and the property supports a retirement income stream, rental income may be exempt from tax depending on whether the fund's assets are fully segregated or proportionately allocated.

Capital gains are also taxed at 15 percent during accumulation phase, with a one-third discount if the property has been held for at least 12 months. That produces a maximum effective rate of 10 percent on the discounted gain. The actual tax depends on the property's adjusted cost base, selling costs, capital improvements, and whether the fund has capital losses to offset.

If the property is sold while supporting a pension, the capital gain may be fully or partially exempt depending on the fund's circumstances. The exemption is not automatic and depends on whether the assets are segregated, whether an actuarial certificate is required, and whether minimum pension payments have been met.

Division 296 Tax and Large Super Balances

From 1 July 2026, members with total superannuation balances above $3 million face an additional 15 percent tax on earnings attributable to the amount above that threshold. Balances above $10 million attract an additional 10 percent tax on earnings above that level.

The calculation uses an adjusted measure of the fund's taxable income. Rental income and realised capital gains contribute to that calculation. Unrealised gains do not. The value of your property does not trigger Division 296 tax until you sell and realise the gain. Outstanding loan amounts are disregarded when calculating your total superannuation balance for Division 296 purposes, meaning the liability is assessed on your net interest in the fund.

If your balance is approaching these thresholds, the timing of a property sale and the structure of your fund become relevant. An SMSF can elect to adjust the cost base of its assets to market value as at 30 June 2026 for Division 296 purposes, recognising value that accrued before the new tax commenced. That election applies to all assets held directly by the fund at that date and only affects the Division 296 calculation, not the fund's general CGT position.

What Changed with Residential SMSF Loans in Mid-2026

New borrowing arrangements involving residential property are restricted from approximately 10 August 2026 under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. Residential property does not meet the definition of business real property, so new residential LRBAs are no longer available.

This restriction does not affect commercial property. It does not prevent an SMSF from owning residential property without borrowing. It does not affect existing residential LRBAs or eligible refinancings of those arrangements. The restriction applies only to new limited recourse borrowing arrangements entered into after the commencement date.

For operators already holding residential property in their SMSF under an existing LRBA, the arrangement can continue. Refinancing may be possible under transitional provisions, but the ATO had not published updated guidance on the circumstances that would end an existing arrangement and trigger the new rules as at late July 2026. Anyone refinancing an existing residential LRBA should obtain specialist legal advice before proceeding.

Contribution Caps and Funding Your SMSF Deposit

Building a 30 percent deposit inside your super fund requires either rolling over existing super balances or making contributions within the annual caps. From 1 July 2026, the concessional contributions cap is $32,500 per annum and the non-concessional cap is $130,000 per annum.

The bring-forward arrangement allows up to $390,000 in non-concessional contributions over three years if your total superannuation balance at the end of the previous financial year was below $1.84 million. That figure reduces progressively as your balance approaches the general transfer balance cap of $2.1 million. If your balance equalled or exceeded $2.1 million, your non-concessional cap is nil.

Concessional contributions include employer super guarantee payments, salary sacrifice, and personal deductible contributions. If you are working FIFO and your employer is making super contributions on your full rostered income, those amounts count towards your cap. Additional voluntary contributions need to fit within the remaining cap space. Exceeding the caps triggers additional tax, so timing and planning matter when building a deposit for an SMSF loan.

What to Know Before You Commit

An SMSF property loan is not suitable for everyone. You need a fund balance large enough to cover the deposit, stamp duty, and establishment costs. You need rental income sufficient to service the loan. You need a genuine business use for the property and the ability to document an arm's length lease. You need to be comfortable with the compliance obligations, including annual audits, actuarial certificates if required, and maintaining proper records.

The setup cost is higher than a standard home loan. You will pay for legal advice, trust documentation, property valuation, and SMSF administration. Ongoing costs include loan interest, property expenses, audit fees, and accounting. If your fund balance is below $200,000, those costs may outweigh the tax benefits.

You cannot live in the property. You cannot let a family member use it for private purposes. You cannot improve it using borrowed funds. The sole purpose test applies to every decision you make as trustee. The property must be acquired and maintained for the sole purpose of providing retirement benefits to fund members.

If you are weighing up whether to buy a commercial property inside or outside super, consider your marginal tax rate, your cash flow, your other super balances, and how long until you retire. Property held in super grows in a lower-tax environment but cannot be accessed until a condition of release is met. Property held outside super offers more flexibility but is taxed at your marginal rate. The right structure depends on your specific circumstances.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists who understand the rules for FIFO fixed plant operators and can assess whether this structure suits your situation before you commit.

Frequently Asked Questions