Avoid These 4 Mistakes With SMSF Market Rent Leases

Your SMSF can lease premises to your own practice, but only at market rent.

For maxillofacial surgeons, that means the rooms or surgical suite your company occupies must be charged at the rate an unrelated tenant would pay. Getting this wrong can undo the benefit of an SMSF commercial loan. This article covers the four mistakes we see most often and how to avoid them, so your lender, auditor and accountant are all working from the same file.

What Is Market Rent for an SMSF Related Party Lease?

Market rent is the rent an unrelated tenant would pay for the same property, in its current condition and location, under an arm's length lease. Your practice company or trust counts as a related party of your fund, so it gets no discount and pays no premium.

The lease also needs to read like a real commercial lease. It should set out the rent, payment dates, outgoings, term and how the rent is reviewed. The rent has to actually be paid on time, every period, from the business bank account into the fund bank account. Missed or late payments are an easy way to undermine an otherwise sound arrangement.

Mistake 1: Treating Rooms as Business Real Property Without Checking

Under current rules, a new SMSF loan over real property can only be used for business real property. For a limited recourse borrowing arrangement entered into on or after 10 August 2026, the property must be business real property, which generally means land and buildings used wholly and exclusively in one or more businesses.

The test applies when the loan starts and for the life of the loan. A building described as commercial still fails if part of it is used for another purpose. As an example, if a floor of the building is sublet for non-business use, the whole property could fall outside the definition. If it does, the fund has breached the borrowing rules and compliance action may follow.

Loans entered into before 10 August 2026 are treated differently, and so are contracts exchanged before that date. Which rule applies to you depends on your dates, so confirm them early. Our SMSF loans for dentists page explains how we approach these loans for dental and surgical practices.

What Happens If You Charge Below-Market Rent?

Below-market rent can bring the non-arm's length income rules into play, and that income can be taxed at the top rate of 45 per cent instead of the usual fund rate of 15 per cent. In accumulation phase, a complying SMSF is normally taxed at 15 per cent on rent. Discounted rent, missed reviews or vague paperwork can result in the rent being treated as non-arm's length income taxed at 45 per cent. If the property was acquired on non-arm's length terms, a capital gain on sale can also be affected. Get tax advice.

Setting rent too high is also a mistake. Inflated rent moves money from your practice into the fund beyond what the market supports, and it does not meet the arm's length standard either. Your accountant can explain how rent, deductions and fund tax interact for your situation, because the outcome depends on your circumstances.

Mistake 2: Setting Rent by Handshake Instead of Evidence

Rent should be set from independent evidence, such as a written appraisal from a qualified valuer or agent, and reviewed on a schedule. A figure picked because it suits the practice cash flow is hard to defend at audit.

Consider a surgeon whose practice company pays rent that was agreed informally at $90,000 a year (illustrative figures only). The fund buys the premises under a limited recourse borrowing arrangement, and an independent appraisal puts market rent at $108,000. The surgeon and their accountant set the lease at $108,000, with a fixed annual review clause and rent paid by direct debit on the same day each month.

The trade-off is real: the practice now pays $18,000 more a year, and the fund's cash flow must still cover loan repayments and running costs. The outcome is a lease the auditor can match to an independent figure, and a file that shows the rent was arm's length from day one. Whether the extra rent suits your practice and your fund is a question for your accountant.

Mistake 3: Forgetting the Loan Itself Must Be Arm's Length

The same arm's length standard applies if a related party lends to the fund. A related party lender must not charge more than an arm's length rate of interest. The ATO's safe harbour terms for these loans are set out in PCG 2016/5. A loan that does not meet every term is not automatically treated as non-arm's length, but you will need documents to show it is.

Many borrowers use a bank or non-bank lender rather than a related party. Lender policies on loan-to-value ratios, rates and rental evidence vary, and rates depend on your deposit size and the lender. A SMSF commercial property broker can compare SMSF commercial lenders for you and match the lease terms to what each lender will accept.

How the Lease Fits Into Your SMSF Commercial Loan Application

Lenders generally want to see the lease, the rent basis and the fund's ability to service the loan before they approve it. In practice, that means the appraisal and draft lease should be ready before you apply, not after.

Fund contributions and rent both feed into your serviceability, so it helps to understand your borrowing capacity early. A loan pre-approval does not change which borrowing rules apply. Only a binding contract exchanged before 10 August 2026 is exempt from the business real property requirement. Contracts exchanged now are subject to it, so confirm the property qualifies before you exchange.

Mistake 4: Letting the Lease Drift After Settlement

A lease that was compliant on day one can drift out of line if no one reviews it. Rent reviews get skipped, the practice expands into extra space without a variation, or part of the building is let for a non-business use. Each of these can create a rent or business real property problem years after settlement.

A yearly diary note works well: check the rent against current market evidence, confirm payments match the lease, and confirm the whole property is still used for business. A significant change to loan terms, including a refinance, can start a new arrangement, so involve your broker and accountant before changing a loan.

If your fund is looking at buying your practice premises, we can work through the lease, the lender and the timing with you. Call one of our team or book an appointment at a time that works for you.

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