Why Your SMSF Needs a Proper Lease Agreement with Your Business

A solid lease agreement between your SMSF and your business is more than just a formality. It’s the evidence your fund needs to show the ATO that everything is being done on arm’s length, commercial terms.

It’s not the most glamorous part of running your own super fund, but a lease agreement between your SMSF and your business can make or break the fund’s compliance.It’s the kind of document that seems simple — “I own the property through my super, and my business pays rent” — but it’s also exactly the sort of arrangement the ATO is taking a very close look at right now.

And with more SMSFs holding commercial property through limited recourse borrowing arrangements (LRBAs), the pressure is on trustees to make sure everything is squeaky clean.

Because if it’s not, you might find yourself in the uncomfortable position of failing your SMSF audit — or worse, facing questions from the ATO about whether your fund is still complying with the superannuation rules.

When your super fund is also your landlord

For many business owners, having your SMSF own the premises your business operates from makes perfect sense.It’s a way to:

• Keep your rent payments inside your wealth-building strategy;

• Secure a long-term business location; and

• Potentially benefit from capital growth inside the fund.

  
  

There’s nothing wrong with that — in fact, it’s quite common. But the catch is that SMSFs are heavily regulated, and any dealings between the fund and its members (or entities related to them) must be conducted “on arm’s length terms.”

That means your SMSF must behave like any other commercial landlord. If the tenant wasn’t your business — if it was a stranger — what would the rent be? What would the lease look like? How would you enforce it?

If your answers don’t match what’s actually happening, you’ve got a compliance problem.

The ATO’s focus: related party leases under the microscope

The ATO has signalled that lease arrangements between SMSFs and related parties are a key focus area. Auditors are being told to closely examine these transactions to ensure they’re genuinely at arm’s length.

In practice, this means:

• The rent must be commercially reasonable — not under market to help the business, and not inflated to push more contributions into the fund.

• The lease must be properly documented — ideally in writing, signed, dated, and legally enforceable.

• Terms and conditions (like rent reviews, options, outgoings, and default clauses) should be consistent with what a typical landlord would expect in the open market.

• The payments must actually be made on time and recorded — not just “paper rent” that never hits the bank account.

  
  

Even if you’ve always intended to do the right thing, a missing or poorly drafted lease can create the impression that your fund isn’t acting at arm’s length.

And that’s enough to trigger a compliance breach — something your SMSF auditor can’t ignore.

Why it matters: the risk of failing your audit

Each year, your SMSF must be independently audited to confirm it’s complying with superannuation laws.If your auditor can’t see evidence that the lease is in place and on commercial terms, they’re required to report it as a contravention to the ATO.

That could mean:

• A qualified audit report,

• A reportable breach, and

• Potentially regulatory action if the ATO deems it serious enough.

  
  

Even if no penalty is issued, you’ll likely have to rectify the issue — which can mean backdating documents, obtaining a market rent valuation, or making compensating payments.

And none of that is fun when your fund is under the microscope.

Common traps we see

Having helped many clients with SMSF borrowing arrangements, we often come across a few recurring themes when it comes to leases between the fund and the business:

1. No written lease at all.“We’ve always just paid rent into the SMSF” might sound fine in practice, but without a formal lease, it doesn’t meet the ATO’s documentation standards.

2. Outdated or expired leases.A lease signed years ago and never renewed can be just as problematic as having no lease at all.

3. Rent not benchmarked.The rent must be supported by market evidence — like an independent appraisal or comparable listings.

4. Missed rent payments.If your SMSF bank statement shows irregular rent payments, that raises questions about whether the arrangement is truly commercial.

5. Lease terms that favour the business.Things like rent-free periods, indefinite terms, or generous rent holidays might look fine from a business perspective, but not from the fund’s.

   
   

Getting it right: simple steps that keep your fund compliant

The good news is, ensuring your lease is compliant isn’t complicated — it just requires attention to detail and proper documentation.

Here are some practical steps to keep things in order:

• Have a written lease drafted or reviewed by a solicitor familiar with SMSF property rules.

• Set the rent at market value, backed by independent evidence (and update it periodically).

• Stick to the terms — pay rent on time, in full, to the SMSF bank account.

• Keep records of payments and correspondence in case the auditor or ATO ever ask for them.

• Review the lease regularly, especially when rent reviews or renewals are due.

  
  

These steps might sound procedural, but they’re what make the difference between a compliant SMSF and one that attracts unwanted ATO attention.

Why this matters more than ever

With the ATO turning up the heat on SMSF compliance, and more funds using borrowed money to buy business property, the paperwork matters more than ever.

It’s not about ticking boxes for the sake of it — it’s about protecting your super and ensuring your fund’s investment strategy doesn’t get derailed by a technical breach.

For many trustees, the property owned by the SMSF is a cornerstone of their retirement strategy.It deserves the same professional approach you’d apply to any other business transaction — and that starts with a proper, enforceable lease.

Final thoughts

A solid lease agreement between your SMSF and your business is more than just a formality. It’s the evidence your fund needs to show the ATO that everything is being done on arm’s length, commercial terms. And when you’re managing both your business and your retirement future, that’s not a corner worth cutting.

While this isn’t legal or financial advice, if you’re unsure whether your lease is up to standard, it’s a good idea to have it reviewed by your SMSF auditor or legal advisor before your next audit.

Because when it comes to SMSF compliance, prevention really is better than cure.