Key Highlights

• It can where the asset satisfies the Business real property definition and all other LRBA conditions.

• Potentially, if the property qualifies and the Acquisition and Lease comply with the related-party and arm’s-length rules.

• No. The property must meet the statutory wholly-and-exclusively business-use test.

• Trustees should assess concentration, liquidity, valuation, lease terms, borrowing costs and compliance documentation.

The 2026 restriction on SMSF residential borrowing has done more than close a door; it has redirected attention. Because a new limited recourse borrowing arrangement (LRBA) can still fund business real property, commercial property has moved to the centre of the SMSF property conversation. Business real property also carries a long-standing and genuine advantage — it can, in defined circumstances, be acquired from a related party. But it is a technical area with a demanding definition and strict conditions, and it does not suit every fund. This article examines the rules that now make commercial property the focal point, and the cautions that go with it.

Why commercial property is now in focus

From 10 August 2026, under Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, a new LRBA can acquire real property only where the property is business real property. Residential property no longer qualifies. That makes business real property the sole class of real estate that trustees can gear into through a new SMSF borrowing — a structural reason for the shift in focus toward commercial assets, quite apart from any view about their Investment merits.

What business real property actually means

Business real property is defined in the SIS Act 1993. In broad terms, it is an interest in real property where the underlying land is used wholly and exclusively in one or more businesses. Two elements do the work. The "real property" element covers land and fixtures. The "business use" element requires that the property be used wholly and exclusively in the carrying on of a business — the test that separates qualifying commercial premises from passive or residential holdings.

The "wholly and exclusively" standard is strict. Property used only partly in a business, or used for a mix of business and private purposes, will generally fail. A shop, office, warehouse, factory or medical suite used entirely in running a business typically qualifies; a residential rental let as a home does not, because letting a home is not the relevant kind of business use. There are limited situations where property with a residential character can qualify — for instance, where it is used wholly and exclusively in a genuine property or accommodation business — but these are fact-specific and should not be assumed.

The related-party exception that makes commercial different

One feature sets business real property apart from most other Assets an SMSF might acquire. As a general rule, an SMSF is prohibited from acquiring assets from a related party. Business real property is a specific and genuine exception: an SMSF can acquire business real property from a related party, provided the acquisition is at market value. This is why business owners have long used their SMSFs to hold the premises from which they operate — for example, a trustee's operating company can sell, or the fund can buy, the business premises to the fund at market value, and the fund can then lease it back to the business.

That leaseback is itself subject to conditions. The lease must be on arm's-length terms, at a genuine market rent, and business real property leased to a related party is generally exempt from the in-house asset rules that would otherwise limit such dealings. These are the mechanics that make the commercial-premises strategy work — but each condition must be met, and Market Value must be properly supported, typically by independent valuation.

Hypothetical example

Consider the Aria Super Fund, whose members run a physiotherapy practice from leased rooms. The practice company owns the consulting premises, which are used wholly and exclusively in the business. The trustees are considering having the fund acquire the premises. Because the property is business real property, the fund may be able to acquire it from the related company at market value, and could fund the purchase either with cash or, if it wished to gear, through a new LRBA — an option that would not be available for a residential asset. The premises would then be leased back to the practice at market rent on arm's-length terms. Every step depends on the property genuinely meeting the definition and the valuation being sound. This example is illustrative only and not advice.

Risks and mistakes to avoid

The central risk is over-optimism about the definition. Trustees sometimes assume any commercially used property qualifies when the wholly-and-exclusively test is not met — mixed-use premises, part-residential buildings and properties with significant private use are common trip-hazards. A second risk is valuation: acquiring from a related party requires market value, and an unsupported or optimistic figure can create compliance problems. A third is concentration and liquidity: a single commercial property can dominate a fund's assets, and vacancy or a tenant's business failure can strain the fund's ability to pay pensions and expenses. Commercial property is not automatically a safer or better option than the residential exposure it may replace.

What trustees should watch next

Trustees weighing business real property should confirm the asset genuinely meets the SIS Act definition, obtain independent valuations for any related-party acquisition, and ensure any leaseback is documented on arm's-length terms. They should also watch ATO guidance, which continues to address how the business real property test and the new LRBA restriction interact.

Conclusion

Commercial property has become the new focus of SMSF property strategy because it is the one class a new LRBA can still fund, and it carries a genuine related-party acquisition exception. But business real property is a technical field with a strict definition and firm conditions, and it does not suit every fund or every member. Trustees should test the fundamentals carefully and may wish to obtain appropriately qualified professional advice before proceeding.