Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 255

The allure of business real property in SMSFs

The business real property (BRP) strategy for SMSFs has a reputation for being complicated to design and execute. This needn’t be the case and people should not be afraid to look into it.

The ‘BRP strategy’ is where an SMSF acquires business real property and then leases that property to a related party who runs a business from there. It comes with no real tax law or super law risk. In fact, the law has been written specifically to encourage the use of a BRP strategy. It is a rare situation where SMSF members who are also business people are significantly advantaged by having an SMSF.

The garden variety is clear and no one thinking about a BRP strategy should fear it. It’s a doctor whose SMSF owns the property where the surgery is. The tradie who has a workshop. No private use. It’s just a workspace. A retail operator who wants to own the shop the business operates from.

In such circumstances, a BRP strategy within an SMSF can work well. The BRP strategy has become even more attractive after recent super reforms, and SMSF members and trustees might consider revisiting it.

A qualification is that, at the margins, it can be complicated. Can a residential building, for example, be business real property? Maybe. Maybe not. People should tread carefully going into such BRP grey areas.

The current law and attraction for businesses

Generally, transactions between an SMSF and a related party are totally out of the question. An SMSF can’t buy things from a member although an SMSF can sell things to a member for full market value. An SMSF can’t make loans and can’t lease things to a member. It’s mostly in a set of rules generally referred to as the ‘in-house asset test’. But BRP is exempt from all that. Critically, this means an SMSF can own BRP and then lease it to a related party.

From a business perspective, it can be very useful to have an SMSF own the BRP. It provides the business with long-term security. The business tenant doesn’t have to worry about being kicked out if the property is sold or the landlord changes direction. Having to move business premises is expensive and disruptive. It’s also a great asset protection strategy for the BRP owner, the SMSF.

The SMSF can be well protected from the various risks of the business.

The super reforms

The government’s objective from the super reforms was to achieve some kind of ‘reigning in’ of super. A big part of this was to limit how much people will be able to put into super due to contribution limits. So:

1. The concessional contributions cap went from a maximum of $35,000 to a maximum of $25,000 per annum

2. The non-concessional contributions (NCC) cap went from $180,000 to 100,000 per annum

3. Once a member has a total superannuation balance of more than $1.6 million, they cannot make any more non-concessional contributions.

What does that have to do with BRP?

Paying rent to an SMSF is not a contribution to super. Consider this example.

Mark is a 55-year-old designer with $2 million in his super fund. He operates a successful design business through a company. He would like to get as much into super as possible. The lowest tax rate on his business profits is the small business tax rate of 27.5%. He knows about a commercial space that he could purchase for $1 million that is currently rented out for $80,000 a year. It would perfectly fit the requirements for his business workshop. He currently rents workshop space.

If he employs a BRP strategy via an SMSF then he will pay that rent from his business to his SMSF which effectively transfers $80,000 per year from a 27.5% tax environment into a 15% tax environment. It’s still his money. He saves $10,000 in tax a year and compounds that for several years in a low tax environment. He obliterates the concessional contributions cap of $25,000 (which he could also put in from his business) because the business entity will get a tax deduction for the rent of a workshop space.

He has just grabbed back everything the government took by reducing the NCC from $180,000 to $100,000. The full NCC cap of $100,000 for the year remains intact if he happens to have some spare after-tax cash. He can keep using this BRP strategy even though he has a total superannuation balance of over $1.6 million. Any capital gain on the property will also be derived in a very friendly capital gains tax environment.

Future obligations

The main obligation going forward is the idea that the investment must be maintained on an arm’s length basis. Mark’s business will have to make sure that it pays an arm’s length rent, calculated using well-known principles. That rule is designed to make sure that the SMSF doesn’t let the related business only pay nominal rent which would clearly be providing Mark a present-day benefit. However, Mark is actually trying to do the exact opposite.

In fact, Mark is probably wanting to push the envelope in the other direction to get more into his SMSF. Perhaps Mark’s property could get a rent of $100,000 as determined by a valuer and signed off by an auditor. It’s hard to see how that would violate the arm’s length rule in super. It would be more likely to potentially violate the anti-avoidance rule in tax law. What is happening here is a transfer pricing type of exercise: Possibly overcharging on the yield from an asset to get tax deductions in a high tax environment, and assessable income in a low tax environment, whilst keeping control of the cash.

The super reforms limited what people can put into super. The use of a BRP strategy eases some of those limitations for small business owners.

Stephen Lawrence is a Chartered Accountant, CA SMSF Specialist, TEP and Member of the International Tax Planning Association. These views are considered an accurate interpretation of regulations at the time of writing but are not made in the context of any investor’s personal circumstances.

RELATED ARTICLES

No change to super should be urgent

Putting the ‘self’ into self managed super

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.