Compliance Checklist: Buying Commercial Property with Your SMSF

Purchasing commercial property through your Self-Managed Super Fund (SMSF) can be a powerful strategy — offering tax benefits, asset protection, and the opportunity to build wealth for retirement. But it's not without complexity. With strict ATO regulations and compliance requirements, getting the structure wrong can trigger penalties or invalidate the investment altogether.

This checklist will walk you through the critical compliance steps for buying commercial property with your SMSF, ensuring your investment strategy aligns with superannuation law.

1. Confirm Investment Strategy and Sole Purpose Test

Before your SMSF can acquire any asset — especially property — you must ensure the investment aligns with the fund’s investment strategy.

This document should clearly outline:

• Risk tolerance and diversification
• Liquidity to meet retirement payments and expenses
• Return expectations
• Insurance considerations for fund members

Additionally, the Sole Purpose Test is fundamental. Your SMSF must exist solely to provide retirement benefits to its members or their dependents. Using property for private purposes, or to benefit related parties beyond arm’s length dealings, is prohibited.

Before purchasing property you should ensure your investment decisions are consistent with your documented SMSF investment strategy and ensure that you comply with the sole purpose test under the Superannuation Industry (Supervision) Act 1993.

2. Determine Property Type: Commercial vs Residential

An SMSF can buy either commercial premises or residential property, but different rules apply.

• Residential property cannot be lived in by fund members or related parties.
• Commercial property can be leased to a related party (e.g. your business) provided it is leased at market rate under a formal, arm’s length lease agreement.

For business owners, purchasing your business premises through your SMSF and leasing it back to your company is both allowed and common — but it must be correctly structured.

Before purchasing the property you should define the type of property and intended legal ownership structure and ensure leases to related parties comply with market value and commercial terms.

3. Understand Related Party and In-House Asset Rules

Buying property from or leasing to a related party (such as yourself or a business you control) is only allowed in very specific circumstances:

• The property must be business real property
• The transaction must occur at market value
• The lease must be commercially sound

Further, SMSFs cannot exceed 5% of fund assets in in-house assets, which includes loans or investments in related entities (unless exempt).

Confirm the transaction meets related party exemption rules

Keep in-house asset limits below 5% of fund assets

4. Use of Borrowing: Limited Recourse Borrowing Arrangements (LRBAs)

If your SMSF doesn’t have enough liquid assets to fund the property outright, it may be able to borrow using an LRBA. This structure allows your SMSF to borrow money under strict terms:

• The loan must be limited recourse, meaning the lender can only access the property, not other fund assets
• A separate bare trust must hold the property on behalf of the SMSF
• The asset must be acquired at market value

The LRBA must be consistent with your SMSF's investment strategy, and repayments must be made from the SMSF's resources (e.g. contributions, rental income).

Set up a compliant bare trust before signing the contract

Ensure the loan complies with borrowing restrictions under the Superannuation laws

Document the LRBA in your fund’s financial statements

5. Conduct Independent Valuation and Market Rate Lease

The Australian Taxation Office (ATO) expects SMSFs to transact at arm’s length, which means all purchases, leases, and valuations must reflect market value.

• An independent valuation should support the property’s purchase price
• Rental income should be at market rate
• Lease terms should be documented with commercial property conditions (duration, rent reviews, etc.)

Obtain a formal property valuation from a licensed valuer

Draft a lease agreement reflecting market rent and commercial terms

6. Stamp Duty, Legal Ownership and Title Structure

The legal ownership of the property must reflect the trustee of the bare trust until the LRBA is repaid. Most states in Australia levy stamp duty on transfers to and from trusts — so getting this right upfront avoids costly errors.

Register the bare trust before exchange of contracts

Check with your state’s Office of State Revenue for stamp duty concessions

Title must reflect the bare trustee, not the SMSF trustee, until the loan is paid off

7. Administrative Responsibilities and Financial Reporting

Like all SMSF transactions, buying and holding property involves strict administrative responsibilities. You must maintain clear documentation:

• Financial statements showing rental income, loan repayments, and expenses
• Lease agreements, market valuations, and LRBA documentation
• Compliance with ATO regulations and the annual SMSF audit

The SMSF’s fund members must also be informed and agree with all transactions, especially where related party dealings are involved.

Maintain clean financial records and obtain professional advice

Include property and LRBA details in annual SMSF trustee reports

8. Pension Phase, Retirement Benefits and Tax Implications

When your SMSF enters the pension phase, rental income and capital gains from the property may be tax free, provided the asset supports pension liabilities.

This creates a major incentive for business owners nearing retirement to:

• Acquire their business premises in their SMSF
• Pay rent to the SMSF (concessional tax)
• Receive tax-free retirement income from the property later

However, ensure your SMSF has sufficient funds to cover pension payments and fund liabilities without breaching liquidity requirements.

Check how the property will support your retirement benefits

Understand tax implications when moving to pension phase

9. Additional Considerations

Here are a few more important checks:

• Compliance costs: Budget for accounting, auditing, legal, and valuation expenses
• ATO scrutiny: Property transactions involving related parties or LRBAs are often flagged for review
• Exit strategy: Plan for liquidity — commercial property is an illiquid asset and may affect your ability to meet benefit payments or wind up the fund

Review key responsibilities of SMSF trustees

Consider an independent trustee or corporate trustee for better governance

Summary Checklist

Final Thoughts

Buying commercial property through your SMSF can be a smart, tax-effective move — but it’s governed by strict rules and subject to close regulatory oversight. Engaging with experienced advisors, including a specialist accountant, SMSF administrator, and lender familiar with SMSF property loans, is essential.

By following this checklist and keeping your fund compliant, you can enjoy the benefits of owning commercial property while building retirement wealth on solid legal and financial foundations.

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