Commercial property is one of the most powerful investment options available to self-managed superannuation funds (SMSFs). Yet, when a fund buys or leases a commercial property involving a related party, the compliance rules are complex. The ATO’s Self Managed Superannuation Funds Ruling SMSFR 2009/1 and the SIS Act provisions ss 66, 71 and 109 set out the framework, and understanding how these interact is critical.
Acquiring a Commercial Property from a Related Party
SISA Section 66 prohibits an SMSF from acquiring assets from a related party unless a legislative exception applies. The key exception is where the asset is business real property (BRP) as defined in s 66(5).
Under this section and SMSFR 2009/1, business real property means: ‘Any freehold or leasehold interest in real property, or an interest in Crown land capable of assignment or transfer, where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not).’
If the fund purchases a property that does not meet these conditions at the time of acquisition, the transaction breaches s 66 and usually will be reportable breach.
Key tests in the definition:
Permanent fixtures form part of the real property; demountables do not.
Real property includes land and “anything affixed to the land”, such as buildings and structural improvements. Portable buildings or removable fit-outs are excluded unless their attachment is intended to be permanent.
Wholly and exclusively used in a business.
The property must be physically used in a business. The test looks at the use of the property as a whole. Minor or incidental use that does not detract from business operations can be ignored under the de minimis rule.
Is there a business?
The ATO applies ordinary business indicators (TR 97/11 paras 23-93): a profit-making purpose, repetition, and systematic management are key factors. The activities must be “commercial in character” and conducted on a continuous basis.
Timing of the test
BRP status must exist at the time of acquisition. SMSFR 2009/1 [225] clarifies that temporary vacancies while seeking tenants do not defeat the test, but token business use staged before purchase will.
Other considerations at acquistion
- Independent valuation: In practice, an independent market valuation is essential to demonstrate the purchase price reflects fair value. Altough not legally required, in order to reduce the substantial risks of non-compliance, a written appraisal by a licensed valuer is expected. Over- or under-valuing the property may breach s 109 and expose the fund to non-arm’s-length income (NALI) implications.
- Minutes confirming strategy alignment are expected: Trustees should consider how the acquisition fits within the fund’s investment strategy—specifically the liquidity, diversification, and risk considerations under reg 4.09.
- Due diligence on title and use: Where a property has mixed zoning (commercial and residential), trustees should confirm that the entire portion being acquired qualifies as BRP.
- GST: The acquisition of commercial property by an SMSF may involve GST implications depending on registration status: If the vendor is registered for GST and the sale is not a going concern, the fund may need to pay GST on the purchase price. The fund itself can generally claim input tax credits on acquisition costs (including GST on legal and valuation fees) if it is registered and makes taxable supplies (e.g. leasing to a commercial tenant). Where the property is sold as a going concern (under s 38-325 of the GST Act), the transaction can be GST-free if both parties are registered for GST and all business assets are transferred.
Receive our SMSF Commercial Property Audit Checklist
A practical checklist used by SMSF auditors to review related party property transactions and avoid common compliance issues.
Compliance of a Related-Party Lease (Property Inside the Fund)
Both s 71(1)(g) and s 109 require a written lease in place.
In-house asset exemption – s 71(1)(g)
Under s 71(1), assets leased to related parties are normally in-house assets, capped at 5% of fund assets. However, s 71(1)(g) excludes from this definition any business real property of the fund that is subject to a legally enforceable lease between the trustee and the related party, and used wholly and exclusively in one or more businesses.
There must be a written lease agreement to qualify for the exemption.
The property must continue to meet the BRP definition (section 66(5)) to retain the in-house asset exemption. If the related-party tenant ceases trading or introduces private use, the property ceases to be BRP, and the property becomes an in-house asset.
Business use is assessed “by reference to the actual use of the land over the relevant period.” For example, a building used as an accounting firm office but later partly converted to a residence will fail the test from that time onwards.
Arm’s-length rule – s 109
All SMSF transactions must be conducted as if between unrelated parties. A written, enforceable lease is essential evidence of commercial terms and market rent.
Our Related Party Lease Checklist sets out key audit benchmarks:
Lease signed and dated by both parties.
Rent paid in advance, or consistent with the frequency in the agreement.
Rent reviews clearly specified (CPI, market, or fixed %). Unsupported fixed increases are non-arm’s-length.
Responsibilities for outgoings and insurance defined clearly.
Independent rental appraisal incorporating incentives or fit-outs.
Property demonstrably used wholly in one or more businesses.
Leases to both related and unrelated parties
It is common for commercial buildings such as medical suites or mixed-use offices to be occupied by both related and unrelated tenants. Two scenarios frequently occur:
Independent tenancies.
The property is divided according to the floor plan, and each tenant—related or not—operates independently under separate leases at market rent. This satisfies s 109 as long as each lease is legally enforceable and reflects commercial terms.- Head-lease and sublease model.
Where a related party occupies the majority of the premises and provides shared services (for example, reception or equipment) for smaller practices, it is often more practical for the related party to hold a head lease and sublet to the others. Under this arrangement, the related-party tenant pays market rent to the SMSF, while unrelated occupants pay service fees and sub-rent to the related-party tenant. These payments should not flow through the SMSF. The head lease must remain at market rent and expressly permit subleasing. The sublease should be documented and restricted to business use.
Ongoing evidence and auditor focus
An SMSF Auditor will review annual rent receipts, rent reviews, insurance cover, and business use when assessing whether the property continues to satisfy section 109 and SMSFR 2009/1 . Temporary vacancies do not defeat BRP status if the property is being actively re-let.
Auditors also expect evidence that any refurbishment or improvement costs paid by tenants are treated correctly.
When the SMSF pays for capital improvements to a property that’s leased to a related party, it can raise several compliance and tax issues — especially under SIS s 109 (arm’s-length rule), s 65 (financial assistance), and sometimes s 66 (acquisition of assets from a related party).
If the SMSF pays for an improvement that primarily benefits the tenant — such as: adding extra rooms, installing specialised equipment, refurbishing the tenant’s office layout, or building facilities the tenant requests, then the fund is effectively improving the tenant’s business premises at its own cost. In these circumstances, it’s essential to demonstrate the nature of the transaction is commercially reasonable. If it’s reasonable, then updated property valuation and rental appraisal are required.
Given the level of judgement involved, related-party lease arrangements are best reviewed with an SMSF auditor before they are finalised, to ensure the structure remains compliant and defensible.
Primary-Production Land
Rural properties often combine domestic and business use. Section 66(6) provides a safe harbour allowing up to two hectares of domestic use without breaching the BRP definition, provided the predominant use is primary production.
To support this, trustees should keep:
Land-use maps or aerial photos showing the business versus private areas.
ABN and evidence of active farming (livestock records, produce sales, or Business Activity Statements).
Confirmation that the property is not primarily for lifestyle or hobby purposes.
Conclusion
Commercial property within an SMSF can be an excellent investment, but related-party transactions demand meticulous compliance.
At acquisition, trustees must confirm the property qualifies as business real property under s 66(5), applying the tests in SMSFR 2009/1. During ownership, the property must continue to be used wholly in a business to maintain the s 71(1)(g) exemption.
All leases—whether with related or unrelated tenants—must be arm’s length under s 109, supported by written agreements, current rent appraisals, and timely payments. Subleases to unrelated tenants are acceptable if the property remains used in a business and the arrangements are properly authorised and documented.
Primary-production land enjoys limited flexibility under the two-hectare safe harbour but still requires evidence that business use is predominant. Trustees should maintain valuations, insurance, and minutes confirming investment-strategy alignment.
With clear leases, objective market evidence, and continuing business use, trustees and auditors can be confident their fund is compliant, defensible, and audit-ready.