Avoid These 5 Mistakes When Leasing Property to Your Own Business

Can You Use Super to Buy Your Workshop and Lease it Back?

You can use your self-managed super fund to buy commercial property and lease it back to a related party business, including your own plumbing business, provided the property qualifies as business real property and you follow the arm's length rules. The property must be used wholly and exclusively in one or more businesses when the loan arrangement begins and for the entire life of the loan.

Consider a plumber who runs their own business and wants to buy the workshop they've been renting. The property is a standalone commercial unit that houses the business office, tool storage, and a small yard for work vehicles. The plumber's SMSF borrows to buy the property under a Limited Recourse Borrowing Arrangement and leases it back to the plumbing business at market rent. The rental income flows into the super fund, and the plumbing business can claim the rent as a deductible expense. The setup works because the property is used wholly and exclusively for business purposes and the lease is at market rates.

The Rule That Changed in August Last Year

From 10 August 2026, any new loan arrangement to purchase real property under an SMSF must be for business real property only. Arrangements entered into before that date are not affected, even if you refinance or maintain the loan after August. The rule applies whether the lender is a bank, a non-bank lender or a related party.

If you exchanged a binding contract before 10 August last year but settled afterwards, the old rule still applies. If a contract is changed significantly and its fundamental terms no longer exist, it may be considered that a new arrangement has begun. Most contract variations won't trigger this, but replacing the property or the buyer probably would.

What Counts as Business Real Property

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. A commercial description does not by itself mean a property is business real property.

The property needs to be used wholly and exclusively for business when you enter the loan arrangement and for the entire time the loan exists. If a real property asset stops being business real property during the loan arrangement, the SMSF fails to maintain the arrangement under the rules and compliance action may apply. For land on which commercial premises are leased, the property does not stop being business real property only because the owner is looking for a new tenant, but it does if the owner abandons plans to lease it.

A workshop with an attached residential flat creates problems. Even if the flat is small and the workshop is the main use, the property isn't used wholly and exclusively for business. A plumber setting up a loan arrangement after August last year cannot finance that property under an SMSF loan. A plumber who bought before that date and is still paying off the loan is unaffected.

The Arm's Length Rent Requirement

A related party lender must charge no more than an arm's length rate of interest, and arm's length terms for loan arrangements established by SMSFs are set out in Practical Compliance Guideline 2016/5. The same principle applies to rent. When your SMSF owns the property and leases it to your plumbing business, the rent must reflect what an unrelated landlord and tenant would agree to in the open market.

Charging below-market rent creates multiple issues. Non-arm's length income is taxed at the highest marginal tax rate of 45 per cent. The ATO can also treat the arrangement as a breach of the sole purpose test if the fund is providing a benefit to you or your business rather than providing retirement benefits to members. Charge too much and the rent might not be deductible to the business. You need a current market valuation or rental appraisal before setting the lease terms, and you should review it regularly.

Mistake One: Mixing Business and Personal Use

The property must be business real property when the loan starts and throughout the loan term. A plumber who uses part of the workshop for personal storage, stores a personal vehicle on site, or allows family members to use the space for non-business purposes puts the whole arrangement at risk. The test is use, not intent. If the property is used for anything other than business, it's not being used wholly and exclusively for business.

A plumber operating from a commercial unit who decides to sublet part of the space to another tradie's business does not automatically breach the rule, because both uses are business. But if that plumber decides to sublet part of the unit as a short-term residential rental, the property is no longer business real property and the SMSF has breached the borrowing prohibition.

Mistake Two: Not Understanding the Holding Trust Requirement

Under a Limited Recourse Borrowing Arrangement, the SMSF trustee obtains a loan to purchase an asset held in a separate holding trust, the SMSF acquires a beneficial interest in the asset and the right to legal ownership after the loan is repaid, and the lender's recourse is limited to rights relating to the asset. The holding trust cannot be a discretionary trust or a unit trust in which the SMSF trustee is one of a number of unit holders.

The trust that holds the property is not the same as the SMSF itself. Legal title sits with the trustee of the holding trust until the loan is repaid in full, at which point the property is transferred to the SMSF. Your plumbing business leases the property from the holding trust, not directly from the SMSF, even though the SMSF holds the beneficial interest. This structure limits the lender's recourse to the property itself if the loan defaults, protecting other SMSF assets.

Mistake Three: Using the Loan for Anything Other Than Purchase and Holding Costs

The borrowed money must be used to acquire a single asset and can also pay expenses such as loan establishment costs and stamp duty, and costs of maintaining or repairing the asset, but it cannot be used to improve the asset, and drawdowns for capital improvements are not allowed.

You can't draw down on the loan to install a new roller door, extend the workshop, or add a mezzanine floor. Repairs and maintenance are allowed. Replacing a broken tap or repainting the walls is fine. Adding a second bathroom or knocking out a wall to create more space is not. If you want to make improvements, the SMSF needs to fund them from cash reserves or rental income, not from the loan.

Mistake Four: Ignoring the In-House Asset Rules

When property held by the holding trust is leased to a related party of the SMSF, the SMSF's interest in the holding trust is an in-house asset, unless the leased asset would not be an in-house asset if the SMSF owned it directly, such as business real property. Business real property is exempt from the in-house asset rules, which normally cap in-house assets at 5 per cent of the fund's total assets.

If the property stops being business real property during the lease, it becomes an in-house asset. If that pushes the fund's in-house asset ratio above 5 per cent, the fund has 12 months to fix it. If the property was never business real property when the loan was entered into after 10 August last year, the SMSF has breached the borrowing prohibition entirely.

Mistake Five: Not Planning for Refinancing or Sale

The ATO considers refinancing a loan arrangement to mean entering into a new loan contract for the same asset, with the same or a new lender, and the new rule does not apply where an SMSF maintains or refinances, on or after 10 August last year, a loan arrangement entered into before that date. A loan arrangement entered into on or after 10 August last year over real property must be maintained or refinanced while the property still meets the business real property definition.

If you entered the arrangement before August last year and the property wasn't business real property, you can still refinance it. If you entered the arrangement after August last year, the property must remain business real property or the refinance will fail. Under the general loan arrangement rules, a significant change to the terms or conditions of a loan arrangement ends the arrangement and starts a new one, and changes that result in a new arrangement include refinancing the original borrowing, a borrowing inconsistent with the earlier arrangement, and a change to the ultimate beneficiaries of the arrangement.

If your plumbing business closes or you stop using the property for business purposes, the property no longer qualifies as business real property. If that happens while a post-August loan is still in place, the fund has breached the law against borrowing. You would need to repay the loan in full immediately or face compliance action. Planning for this scenario before it happens matters. Some plumbers structure their SMSF to hold multiple properties so that losing business real property status on one asset doesn't collapse the entire fund strategy.

Tax Treatment While the Property is Held

A complying SMSF is taxed at a concessional rate of 15 per cent on its assessable income, which includes net capital gains unless the asset is a segregated current pension asset, and a complying SMSF is entitled to a capital gains tax discount of one-third if the asset was owned for at least 12 months, which produces an effective rate of 10 per cent on the discounted gain. Rental income received by the SMSF is also taxed at 15 per cent during accumulation phase.

An SMSF can receive a tax exemption on investment income from assets that support a retirement phase income stream, and a capital gain is not automatically exempt because a fund has started a pension. If the SMSF is paying a pension to a member in retirement phase and the property supports that pension, the rental income and any capital gain on sale may be partially or fully exempt depending on how the fund is structured and whether assets are segregated.

Division 296 tax applies from 1 July last year and is assessed to the individual, with tax of 15 per cent applying to the proportion of a member's total super earnings that relates to the part of their total super balance above $3 million, and an additional 10 per cent applying to the proportion that relates to the part above $10 million. Loan arrangement amounts are never included in a member's total super balance for Division 296 purposes. The outstanding loan balance is excluded when calculating whether a member is over the threshold, which can reduce or eliminate the Division 296 tax liability for members with large balances.

Getting the Finance and Structure Right

Not all lenders offer SMSF loans. Those that do often have stricter lending criteria than standard home loans for tradies. Loan-to-value ratios are typically lower, interest rates can be higher, and some lenders won't touch related-party lease arrangements at all. You'll also need a bare trust deed for the holding trust, an SMSF trust deed that permits borrowing, and a lease agreement that reflects market terms.

The SMSF itself needs to have enough liquidity to service the loan, pay for property outgoings, and meet the fund's other obligations. Rental income from your plumbing business helps, but the fund needs reserves for periods when the business can't pay rent or the property is vacant. Some plumbers set up the SMSF with multiple members and ongoing contributions to keep cash flow stable. Others use a mix of finance for tradies across different structures, keeping the SMSF loan separate from business and personal borrowing.

A plumber running a successful business who wants to buy their current workshop premises needs an SMSF that's large enough to fund the deposit and cover setup costs, ongoing contributions to help service the loan, and a business that can afford to pay market rent. The plumber also needs advice from a specialist SMSF accountant and a lawyer who understands the trust and leasing requirements. Getting one part wrong can result in the entire arrangement being non-compliant, triggering penalties, back taxes, and in some cases the fund losing its complying status.

Call one of our team or book an appointment at a time that works for you. We work with SMSF lenders who understand how tradies structure their businesses and can help you compare loan options that fit your situation.

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