What are SMSF Market Rent Rules for Related Parties?

Lease your SMSF-owned property to yourself or your business below market rent and you're asking for trouble with the ATO.

The sole purpose test means your super fund exists to provide retirement benefits, not to give you cheap rent. When an SMSF leases business real property to a related party like your company or trust, charging anything less than market rent breaches that test. The income your fund receives must reflect what an independent tenant would pay, and if it doesn't, you risk penalty tax rates and compliance action.

Market Rent Means What an Independent Tenant Would Pay

Market rent is the amount an unrelated tenant would pay for the same property under the same lease terms. Your SMSF trustee must set the rent at a commercial rate from day one and review it regularly to make sure it stays at market level. The ATO expects you to support that rate with evidence such as a qualified valuation, recent comparable leases in the area, or a market appraisal from a licensed agent.

Consider a carpenter who runs their business through a family company. The SMSF buys a workshop under a Limited Recourse Borrowing Arrangement and leases it to the company. If comparable workshops in the same industrial precinct rent for $40,000 a year and the carpenter charges the company $25,000, the fund is receiving non-arm's length income. That income gets taxed at 45 per cent instead of 15 per cent, and the trustee has failed the sole purpose test.

Non-Arm's Length Income Tax Applies to Below-Market Rent

When your SMSF receives rental income from a related party lease that's not on commercial terms, that income is classified as non-arm's length income and taxed at the top marginal rate of 45 per cent. The same rate applies if the lease terms give you other benefits an independent landlord wouldn't offer, like allowing you to pay late without penalty or skipping rent reviews.

The rule applies whether the property is held outright or through an LRBA trust. If your super fund borrowed to buy the property and you're leasing it to your own business, the rental income must cover the loan repayments and still reflect what the market would bear. Undercutting that rate to reduce your business overheads puts the fund's compliance at risk and wipes out the tax benefit of holding the asset in super.

Rent Reviews Must Happen and Must Be Documented

Setting market rent at the start of the lease isn't enough. Your SMSF trustee must review the rent regularly, usually annually or in line with the lease terms, and adjust it to keep pace with the market. If rents in your area have increased and your lease rate hasn't moved, the ATO will treat the gap as non-arm's length income.

Document every review with a valuation, appraisal, or written comparison to recent leases. If your fund is audited, the auditor will ask for proof that the rent charged reflects market conditions at the time. A lease that started at market rate five years ago but hasn't been reviewed since is a red flag. In our experience, failing to document rent reviews is one of the most common mistakes when tradies lease SMSF property back to their own business.

Business Real Property and the Related Party Lease Test

From 10 August 2026, any new LRBA over real property must be for business real property, meaning land and buildings used wholly and exclusively in one or more businesses. Residential property that doesn't meet that definition can no longer be bought with borrowed money in an SMSF, even if it's leased at market rent.

When business real property held by the LRBA trust is leased to a related party of the SMSF at market rent, the SMSF's interest in that trust is not treated as an in-house asset. That exemption only applies if the rent and all other lease terms are on commercial footing. If the rent drops below market rate or the lease includes non-commercial terms, the exemption falls away and the asset may be caught by the in-house asset rules, which cap those holdings at 5 per cent of the fund's total assets.

For tradies using their super to buy the premises they work from, this means your SMSF loan must be over property that qualifies as business real property, and your lease must stand up to scrutiny as a commercial arrangement. If you're refinancing an older LRBA that was set up before the rule change, the property doesn't need to be business real property, but the market rent requirement still applies.

What Happens When You Get the Rent Wrong

Set the rent too low and the fund's rental income is taxed at 45 per cent. Set it too high and the ATO may argue you're using the SMSF to provide a benefit to the fund rather than the member, or that you're inflating the business expenses artificially. Either way, you're outside the bounds of a commercial arrangement.

If the breach is significant or ongoing, the ATO can issue a compliance direction, apply administrative penalties, or in extreme cases make the fund non-complying. A non-complying fund loses its concessional tax rate and the entire balance is taxed at the top marginal rate. The cost of getting the rent wrong far outweighs the cost of getting a valuation and setting it right.

If you're not sure what market rent looks like for your property, get a valuation before you sign the lease. If you've already signed and the rent hasn't been reviewed in over a year, get it reviewed now. The rules around finance for tradies in an SMSF structure are strict, and the ATO's focus on related party arrangements means you can't afford to guess.

Call one of our team or book an appointment at a time that works for you.

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