How to Structure a Lease Between Your SMSF and Your Business

For small business owners, owning the premises from which your business operates can be a game-changer. Leasing a property from your SMSF to your business is allowed, but it comes with strict compliance rules. Breach them, and you risk severe tax consequences — including a 45% penalty tax on income and even trustee disqualification.

Here’s how to structure your lease in a way that satisfies the ATO, benefits your business, and keeps your SMSF on track to deliver long-term retirement benefits.

Make Sure the Property is Business Real Property (BRP)

Only certain properties can be leased from your SMSF to your business. The Superannuation Industry (Supervision) Act 1993 — the SIS Act — allows an SMSF to lease assets to a related party only if they qualify as business real property.

Business real property is defined as land and buildings wholly and exclusively used in one or more businesses.

This includes:

• Offices and retail shops
• Warehouses
• Medical clinics
• Industrial facilities

Not allowed:

Residential property used for personal purposes, or mixed-use properties unless they are 100% business use and meet the definition.

Example: If your SMSF owns a warehouse and leases it to your business that uses the entire space for storage and distribution, it’s compliant. But if part of the warehouse is subleased to someone living in it, the property may no longer meet the BRP test.

Document a Formal Lease Agreement

The lease between your SMSF and your business must be formalised in writing. It should be drafted just like any other commercial lease agreement. Informal or handshake deals won’t cut it — and could put your SMSF in breach of the sole purpose test.

Your lease agreement should cover:

• Names of the SMSF trustee and tenant (the business)
• Commencement and expiry dates
• Market rent and review terms (CPI or market-based)
• Security deposit or bank guarantee
• Maintenance, insurance, and outgoings responsibilities
• Termination clauses and remedies for breach

Use a solicitor who has experience with SMSF leasing to avoid clauses that could conflict with superannuation rules.

Ensure Rent is Set at Market Rates

The rent charged to your business must be the correct amount — meaning fair market value. You can't charge yourself below-market rent to help cash flow, or above-market rent to pump up your SMSF’s income.

To stay compliant:

• Obtain a written rental valuation from a licensed valuer
• Update the valuation every 3 years or at rent review
• Retain the valuation in your SMSF's records for audit purposes

If you charge less than market rent, the ATO may treat the difference as a non-arm’s length benefit, exposing your SMSF to Non-Arm’s Length Income (NALI) tax at 45%.

Pay Rent on Time and in Full

Just because you control both entities doesn’t mean rent can be flexible. Rent must be paid on time, in full, and in accordance with the lease terms.

Best practice includes:

• Setting up a direct debit from your business account
• Reconciling payments against lease terms in your SMSF software
• Charging penalties or interest for late payment (if stipulated in lease)

Missed payments can show up in your SMSF audit and lead to compliance breaches — especially if your SMSF isn’t seen to be enforcing the lease.

Enforce the Lease Like a Real Landlord

Your SMSF must behave like any other landlord. That means you must enforce the lease — chase unpaid rent, conduct rent reviews, and issue breach notices if required.

Why? Because your SMSF is a separate entity with a fiduciary obligation to act in the best interest of its members' retirement — not to prop up your business.

Ignoring arrears or waiving rent out of convenience can be seen by the ATO as a breach of the sole purpose test and trigger significant penalties.

Align the Lease with Your Investment Strategy

Every SMSF must have a documented investment strategy — and acquiring commercial property (especially if geared under an LRBA) must be considered within that plan.

Questions to address:

• Is owning and leasing commercial property in line with your SMSF’s risk profile?
• Will the rental income meet liquidity needs?
• Is the property adequately diversified from other fund assets?

If your fund owns a single asset (e.g. just the business premises), the ATO may expect extra documentation showing why it’s suitable and how risks are being managed.

SMSF Lease Audit Checklist

What If You Get It Wrong?

If you structure your lease incorrectly, the consequences are severe:

• The SMSF could fail the sole purpose test
• Rental income could be taxed at 45% as non-arm’s length income
• The trustee (you) could be fined or disqualified
• The fund may be forced to divest the property

Correcting mistakes after the fact is expensive and stressful. The best approach is to get it right from the start.

Get Expert Advice Before You Lease

If you’re considering buying your business premises through your SMSF and leasing it back, you need advice from professionals who understand:

• SMSF compliance and superannuation law
• Commercial property investment
• Fund structuring and taxation
• Limited Recourse Borrowing Arrangements (LRBAs) if you're borrowing

Final Word

Using your SMSF to buy your business premises and leasing it back is a powerful tool — especially for business owners who value control, certainty, and tax effectiveness. But it must be done correctly.

From drafting the lease and setting market rent to enforcing the agreement and staying within the bounds of the SIS Act, each step must be approached with care.

Need help?

Causbrooks Finance works with professionals who specialise in helping business owners structure their SMSF property leases right — from start to finish. Book a call with our team to get your strategy aligned with the rules and your long-term goals.