Business Real Property in an SMSF: The Test and Why It Now Matters More

What is business real property?

Business real property, according to the Australian Taxation Office (ATO), generally means land and buildings used wholly and exclusively in a business. The ATO's ruling on the term for self-managed super funds (SMSFs), SMSFR 2009/1, sets two conditions. The holder needs an eligible interest in the real property, such as a freehold or leasehold interest, and the land must pass a business use test. An interest held as a beneficiary of a trust estate is excluded.

The ruling calls the wholly and exclusively threshold onerous, but says a common sense approach allows some departure from a literal reading. A part of the property that is not used at all does not by itself fail the test, as long as the property is used to an appreciable degree. Minor, insignificant or trifling non-business use can also be accommodated. The owner does not have to run the business either. A landowner leasing commercial premises to a business can hold business real property without carrying on a property investment business.

Primary production land has its own rule. According to the ATO, a farm with a private dwelling can still qualify if the dwelling sits in an area of no more than 2 hectares and the main use of the whole property is not domestic or private.

The ruling itself is being updated. The ATO released draft SMSFR 2009/1DC on 19 October 2026, with comments due by 27 November 2026. This guide relies on the published ruling, not the draft, so the wording and examples may change when the ATO finalises it.

Why it matters more since 10 August 2026

According to the ATO, from 10 August 2026 the real property asset in a limited recourse borrowing arrangement (LRBA) must be business real property at the time the LRBA is entered into. This change does not apply to an LRBA entered into before that date, or where a binding contract was exchanged before that date. The section on loans already in place sets out those limits.

LRBAs are not banned, and the ATO says the change applies whichever lender is used, whether a bank, a non-bank lender or a related party. Residential property is treated by its use. A residential property that meets the definition can be financed under an LRBA. One that does not can still be held by an SMSF if it meets the other regulatory rules, but it cannot be financed under an LRBA.

Other LRBA limits sit alongside the test. The ATO says an SMSF cannot put an existing fund asset into an LRBA or borrow under one to improve an existing fund asset, and a collection of real property assets treated as a single asset must also meet the definition. The guide to SMSF borrowing after 10 August 2026 covers how the loan structure works.

Worked examples: premises that pass and premises that do not

Actual use decides the test, not the type of building or its zoning, and private living or storage use is a common reason for failure in the examples below. These examples come from the published ruling, simplified here. The ruling says the test depends on questions of fact and degree, so similar facts can still land differently.

The ruling's examples are written largely about a fund buying from a related party, not about loans. The ATO's LRBA changes page sends readers to the same ruling for the meaning of the term, which is why the examples are a useful guide to premises under a loan as well.

Can the fund lease premises to your own business? Yes, on conditions

An SMSF can lease business real property to a member's own business, and the ATO lists this as an exception to the in-house asset rules. A related party includes fund members, their relatives, and any company or trust the member or their associates control or influence, so a trading company you control is usually caught. Without the exception, the premises would count towards the in-house asset limit of 5% of the fund's total market value.

The conditions are specific. According to the ATO, any lease must be on an arm's length basis and reflect market value. The ruling says a leasehold interest must be conferred by a lease or a legally binding lease arrangement. A fund buying the premises from a related party must pay a price that reflects market value, and the ATO warns that income from an asset not acquired or sold at arm's length may be taxed at the highest marginal rate.

Where the premises are held under an LRBA, the asset sits in a separate trust outside the SMSF, and that holding trust adds a layer. The ATO says the fund's interest in the holding trust is an in-house asset when the property is leased to a related party, unless the asset would be excepted if the fund owned it directly, such as business real property. Without that exception, the 5% in-house asset limit is in play, and an excess at year end requires a written plan to reduce it.

If the business itself is still being set up, the guide to sole trader or company compares the two structures.

What if a property under a post-10 August LRBA stops qualifying? A breach that later use does not erase

Where both the contract and the LRBA date from 10 August 2026 or later, the ATO says the property must be business real property when the LRBA is entered into and for its entire life, and that the use must be wholly and exclusively in one or more businesses if tested at any point during the LRBA.

Here is how that can play out across a loan. This example is illustrative, not a real case. A fund exchanges a contract and enters an LRBA after 10 August 2026 to buy a two-storey workshop from an unrelated seller.

The last row has a limit. The ATO says resumption does not remove the original borrowing breach, and regulatory consequences still apply for the period of breach. For non-compliance with the investment restrictions generally, the ATO lists possible actions including penalties, making the fund non-complying, disqualifying a trustee and prosecution. SMSF auditors also report certain breaches to the ATO.

A delayed start needs care too. If approvals hold up use of newly acquired premises, the ATO says the SMSF needs to show that the business had commenced when the LRBA was entered into and that the property will be used in that business. If the tenant is a related party, losing business real property status also raises the in-house asset question covered above.

Loans already in place: generally outside the change

Real property LRBAs entered into, and binding contracts exchanged, before 10 August 2026 fall outside the change, according to the ATO. The position for each one depends on its dates and documents.

• LRBA entered before 10 August 2026. The change does not apply, including when the fund maintains that LRBA on or after that date. The property does not need to be business real property.
• Refinancing an LRBA entered before 10 August 2026. The change does not apply. The ATO treats refinancing as a new loan contract for the same asset, with the same or a new lender. A loan over a different asset is not a refinance on that wording.
• Binding contract exchanged before 10 August 2026. The change does not apply, even if settlement or the LRBA comes later. The ATO's example is an off-the-plan contract with finance approved after that date.
• Variations to that contract. Later variations generally do not change the position. If a contract changes significantly and its fundamental terms no longer exist, the ATO says a new arrangement may have begun.

A contract exchanged on or after 10 August 2026 and financed under a new LRBA has to meet the test, both at the start and for the life of the loan.

What trustees should keep on file

Good records show the property's use and value at each point the rules test them. The list below is a practical aid drawn from the rules above, not an ATO checklist.

• Dates. The contract exchange date and the LRBA date, because they decide which rules apply.
• Lease documents. The signed lease and any later changes, including any subletting, since a legally binding lease is what confers a leasehold interest.
• Market value evidence. The ATO says to keep evidence of how a valuation is determined and give it to the fund's auditor. For real property, one item of evidence is generally not enough unless the fund recently bought the property. Net income yields for commercial premises are not sufficient alone and only suit unrelated tenants.
• Evidence of use. Dated records of who occupies each part of the property and what they do there.
• Vacancy records. Agent appointments and advertising, because the ATO separates looking for a new tenant from abandoning plans to lease.
• Commencement evidence. Proof the business had started when the LRBA began, if approvals delay occupation.
• Refinance papers. The old and new loan contracts, showing the same asset.

Where general information stops

Whether a particular property passes, and whether a fund should buy it or borrow at all, depends on the facts and the fund. This guide is general information. It does not recommend setting up an SMSF, buying a property or taking out a loan.

The ATO says trustees remain responsible for the SMSF when they use a professional, and it describes different roles. Financial advisers can review personal circumstances to help decide whether an SMSF is right, and licensed advisers are registered with the Australian Securities and Investments Commission (ASIC). Tax agent services can include tax advice and SMSF annual returns, and the Tax Practitioners Board shows whether an agent is registered. ASIC notes that accountants, auditors and lawyers may be limited in their ability to give financial product advice about SMSFs.

Lomandra Accounting is a CPA practice, registered with the Tax Practitioners Board and an SMSF Specialist. Its services include property in super guidance with loan compliance checks and trustee education, delivered online by phone, video and email wherever you are in Australia. Sunshine Coast readers can also start at the Sunshine Coast accountant page or the Buderim page, or use the contact page to ask a question.