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Buying a Medical or Allied Health Clinic Through Your SMSF: Rules and Strategy product guide

1Group Property Advisory: Buying a Medical or Allied Health Clinic Through Your SMSF – Rules and Strategy

For most Australians, the idea that their superannuation fund could purchase the very premises from which they earn their income seems almost impossible. But for self-employed healthcare professionals — GPs, physiotherapists, dentists, specialists, and allied health practitioners — this is one of the most financially powerful strategies available within the Australian superannuation system. It's also one of the most compliance-intensive, where the legal framework punishes mistakes harshly but rewards careful structuring generously.

At 1Group Property Advisory, we guide healthcare professionals through complex SMSF property acquisitions. Our conflict-free advice ensures you maintain full compliance while maximising your strategic advantage. This article provides a deep-dive into the business real property (BRP) leaseback strategy: the mechanism that allows your SMSF to purchase your clinic premises and lease them back to your operating practice at market rates. Understanding how this strategy works — and where it can fail — is essential if you're considering this path.

For foundational context on what an SMSF is and whether it suits your career stage, see our guide What Is an SMSF and Is It Right for Australian Healthcare Workers? For a broader comparison of commercial versus residential SMSF property, see Residential vs Commercial Property in an SMSF: Which Is Better for Healthcare Workers?

What Is Business Real Property, and Why Does It Matter for Healthcare Professionals?

The business real property exemption is the legal cornerstone that makes the clinic leaseback strategy possible. Without it, an SMSF cannot acquire property from, or lease property to, a related party — and when you own your practice, the practice entity is almost certainly a related party.

Under the SIS Act and ATO Ruling SMSFR 2009/1, business real property means: "any freehold or leasehold interest in real property, or an interest in Crown land capable of assignment or transfer, where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not)."

This definition achieves two critical outcomes. First, it creates an exception to the general prohibition on acquiring assets from related parties under section 66 of the SIS Act. Section 66 prohibits an SMSF from acquiring assets from a related party unless a legislative exception applies — and the key exception is where the asset qualifies as business real property under section 66(5).

Second, it carves out the property from the in-house asset rules. Business real property is exempt from both the in-house assets and related party acquisition rules, meaning it can represent more than 5% of your fund's value and can be acquired from your business.

For you as a healthcare professional, this means if you own your clinic building personally, you can sell or contribute it into your SMSF — and then have the SMSF lease it back to your medical practice — provided the property is genuinely used wholly and exclusively in that business. The ATO has confirmed this explicitly. Although a building may have been built as residential premises, if it's used wholly and exclusively in a medical practice business, it qualifies as business real property. For the purposes of the related party asset acquisition rule in section 66, the property is business real property of the practitioner. Once acquired by the SMSF, it's also business real property of the fund and therefore not an in-house asset, meaning you're able to sell or contribute the building into your SMSF and have the SMSF lease it back to your medical practice.

The "Wholly and Exclusively" Test: What You Must Prove

The phrase "wholly and exclusively used in a business" isn't a formality — it's an active compliance obligation you must satisfy at the time of acquisition and continuously maintain throughout ownership.

The ATO applies ordinary business indicators from TR 97/11: a profit-making purpose, repetition, and systematic management are key factors. Your activities must be commercial in character and conducted on a continuous basis.

BRP status must exist when you acquire the property. SMSFR 2009/1 clarifies that temporary vacancies while seeking tenants don't defeat the test, but token business use staged before purchase will.

For healthcare professionals, this test is typically straightforward — a physiotherapy clinic, dental surgery, or GP practice is unambiguously a business. The risk arises in mixed-use scenarios. If you use part of your clinic premises for personal storage, or convert a consulting room to a private study, you may inadvertently compromise BRP status. If the tenant ceases trading or introduces private use, the property ceases to be BRP and becomes an in-house asset. Business use is assessed by reference to the actual use of the land over the relevant period.

The Arm's Length Lease Requirement: The Most Common Compliance Failure Point

Once your SMSF acquires the clinic premises, the ongoing compliance burden shifts to the lease itself. Where property is leased to related parties, you need to ensure the lease arrangement between the fund and the related party is on arm's length terms and conditions. This simply means the terms and conditions must be the same as they would have been had the parties not been related.

The arm's length requirement is codified in section 109 of the SIS Act and is non-negotiable. Any lease must be made on an arm's length basis and reflect market value.

What "Arm's Length" Actually Requires in Practice

The ATO doesn't accept informal or verbal arrangements. To ensure your lease arrangement meets the rules, as trustee of your fund, you generally need to: before the arrangement commences, obtain a third party written opinion of the market rental to be charged on the property, and enter into a written lease agreement with the related party on normal commercial terms.

A standard commercial lease from a real estate agent isn't sufficient. A standard lease doesn't contain the specific clauses required under the SIS Act. It won't address the arm's length rules or provide the necessary evidence for an SMSF auditor, putting your fund at significant risk of non-compliance.

The consequences of a non-compliant lease are severe. The ATO can declare the lease an in-house asset. This can lead to significant penalties, including forcing the sale of the property and potentially deeming the fund non-compliant, which has major tax consequences.

Beyond the structural penalty, the tax cost of a non-arm's length arrangement is punishing. The concept of arm's length may also apply to some types of income in your fund. Any income earned through your SMSF by activities conducted on a non-arm's length basis is called non-arm's length income (NALI) and is taxed at the highest marginal rate (45%) instead of the usual 15% concessional superannuation rate.

This is a critical distinction you need to understand: the rent charged to your business must be the correct amount — meaning fair market value. You can't charge yourself below-market rent to help cash flow, or above-market rent to pump up your SMSF's income.

Lease Compliance Checklist for Healthcare Practitioners

All leases — whether with related or unrelated tenants — must be arm's length under section 109, supported by written agreements, current rent appraisals, and timely payments. The following elements must be present in any compliant SMSF lease for a medical or allied health clinic:

Lease Element Compliance Requirement
Parties SMSF trustee as landlord; practice entity (company, trust, or sole trader) as tenant
Market Rent Supported by independent valuation or licensed agent's written appraisal
Rent Review CPI, fixed percentage, or market review at defined intervals — not arbitrary
Payment Terms Paid on time, in full, per the lease schedule — no informal deferrals
Outgoings Clearly allocated between landlord (SMSF) and tenant (practice)
GST Treatment Lease must specify "plus GST" where applicable
Term Defined initial term with documented option to renew
Breach Clauses Formal notice and remedy steps — SMSF must enforce like any arm's length landlord

Your SMSF must behave like any other landlord. That means you must enforce the lease — chase unpaid rent, conduct rent reviews, and issue breach notices if required. Ignoring arrears or waiving rent out of convenience can be seen by the ATO as a breach of the sole purpose test and trigger significant penalties.

Independent Valuation Obligations: What the ATO Expects

As a healthcare professional considering this strategy, you'll frequently ask whether you need a formal valuation, and how often. The answer is more demanding than many practitioners realise.

In practice, an independent market valuation is essential to demonstrate the purchase price reflects fair value. Although not legally required, to reduce the substantial risks of non-compliance, a written appraisal by a licensed valuer is expected. Over- or under-valuing the property may breach section 109 and expose the fund to non-arm's length income (NALI) implications.

The ATO requires SMSF assets to be reported at market value annually in the fund's financial statements. Reliable commercial valuations are a regulatory expectation for SMSFs. The ATO requires fund assets to be reported at market value, and trustees must be able to justify those values with independent and objective evidence. Although a three-year review cycle is often referenced, this doesn't remove the obligation to update valuations when circumstances change.

The ATO's valuation guidelines suggest a new property valuation if the previous valuation undertaken has become considerably or materially inaccurate, or a significant event — such as a natural disaster, market volatility, or a major renovation — may have changed the asset's value.

For your healthcare clinic specifically, triggers for a fresh valuation include: a significant refurbishment of the premises, a change in the surrounding medical precinct (such as a new hospital opening nearby), a rent review under the lease terms, or any change in the clinic's operating status. Where a property is leased to a related party, rental evidence becomes even more critical. Auditors expect clear proof that rent is charged on arm's-length terms. A professional commercial valuation documents this analysis in detail, reducing the risk of compliance concerns.

GST Implications for Medical and Allied Health Clinic Leasebacks

GST is a compliance layer that many healthcare professionals overlook when structuring a clinic leaseback, and the consequences of getting it wrong can be costly.

An SMSF must register for GST if its actual or projected annual GST turnover exceeds $75,000. This is the current threshold for GST registration. While most SMSFs earn only dividends, distributions, interest, and residential rent — which are input-taxed and excluded from GST turnover — commercial rental income is subject to GST and counts towards the $75,000 threshold.

For your healthcare clinic with a market rental of, say, $7,000 per month ($84,000 per year), the fund's commercial rental income exceeds the threshold and GST registration is mandatory. If projected turnover is $80,000 because of a CPI increase on lease payments, the fund has gone over the $75,000 limit and must register for GST within 21 days of the change.

Once registered, your SMSF must charge GST on the commercial rent and remit it to the ATO. Many SMSF trustees structure commercial lease agreements as "plus GST" to ensure the GST component is clearly separated and passed on to the tenant. This approach maintains the intended rental yield while satisfying GST obligations.

There's an important upside: 100% of the GST on the related expenses can also be claimed back by the SMSF. This means the fund can claim input tax credits on acquisition costs such as legal fees, valuation fees, and property management costs, provided these relate to the taxable (commercial) supply. The fund itself can generally claim input tax credits on acquisition costs — including GST on legal and valuation fees — if it's registered and makes taxable supplies such as leasing to a commercial tenant.

Healthcare-specific note: The medical services you provide through your clinic tenant are often GST-free under the A New Tax System (Goods and Services Tax) Act 1999. However, this doesn't affect the GST treatment of the commercial rent paid by your practice to the SMSF — that rent is a separate taxable supply and GST applies regardless of the nature of your tenant's business.

Repairs vs. Improvements Under an LRBA: The Line You Must Not Cross

Many healthcare professionals who purchase their clinic through an SMSF do so using a Limited Recourse Borrowing Arrangement (LRBA). This introduces a critical constraint that's frequently misunderstood: the distinction between allowable repairs and prohibited improvements using borrowed funds.

(For a full explanation of the LRBA structure, see our guide SMSF Limited Recourse Borrowing Arrangements (LRBA) Explained for Healthcare Workers.)

Subparagraph 67A(1)(a)(i) of the SIS Act provides that borrowings under an LRBA cannot be used to fund improvements. However, money from other sources can be used to improve (or repair or maintain) a single acquirable asset. For example, accumulated funds held by the SMSF may be used to fund the improvements.

The ATO's ruling SMSFR 2012/1 also makes clear that any improvements — even funded from the SMSF's own cash — must not result in the acquirable asset becoming a different asset. If alterations or additions are made to the physical object or the proprietary rights that comprise an asset held under an LRBA and, having regard to both the object and the proprietary rights, those alterations or additions fundamentally change the character of that asset, this results in a different asset being held on trust under the LRBA.

Practical Examples for Healthcare Clinic Owners

Allowable (Repairs and Maintenance — can use borrowed funds):

  • Repainting consultation rooms
  • Replacing broken fixtures or fittings
  • Repairing a damaged roof section
  • Replacing worn carpet with equivalent carpet

Not Allowable Using LRBA Funds (Improvements):

  • Adding a new room, garage, or granny flat; installing a swimming pool or spa; converting a storage shed into a studio apartment; upgrading a basic kitchen to a luxury kitchen with higher specifications.

For your healthcare clinic, the most common prohibited improvement scenarios include: adding a new consulting room or procedure suite, installing a sterilisation room where none existed, or converting a waiting area into a dispensary. These would all constitute improvements that change the character of the property and cannot be funded with LRBA borrowings.

If your SMSF uses its own cash reserves — not borrowed money — some improvements may be permitted, provided they still comply with the sole purpose test and fund rules. This means if you're planning clinic upgrades, you should maintain adequate SMSF cash reserves separate from the LRBA, and time major works for after the loan is repaid where possible.

The Multi-Tenant Medical Suite: A Common Scenario

A particularly common scenario in healthcare is the mixed-occupancy medical suite, where you as a GP or specialist own the clinic building but share it with other practitioners — some related, some unrelated.

Commercial buildings such as medical suites or mixed-use offices are often occupied by both related and unrelated tenants. The property is often divided according to the floor plan, and each tenant — related or not — operates independently under separate leases at market rent.

Where a related party occupies the majority of the premises and provides shared services (such as reception or equipment) for smaller practices, a head-lease structure may be appropriate. Under this arrangement, the related-party tenant pays market rent to the SMSF, while unrelated occupants pay service fees and sub-rent to the related-party tenant. These payments should not flow through the SMSF. The head lease must remain at market rent and expressly permit subleasing.

SMSFR 2009/1 supports this structure, noting that the BRP test concerns use of the property rather than the legal identity of the user. If the sub-tenant operates a genuine business, the property remains BRP, provided the head lease is commercial.

Key Takeaways

The BRP exemption is the gateway. Your clinic must be used wholly and exclusively in a business at the time of SMSF acquisition and continuously thereafter. Any personal use — even incidental — risks losing the exemption and triggering the in-house asset rules.

The arm's length lease is non-negotiable. A compliant, SIS Act-specific written lease with independent rental evidence must be in place before the arrangement commences. Charging below-market rent to ease your practice cash flow, or waiving rent arrears informally, can trigger NALI tax at 45% on all rental income.

Valuation is an ongoing obligation, not a one-off. The ATO expects market valuations to be current, objective, and supportable. For your medical clinic, any material change in the property, the surrounding healthcare precinct, or the lease terms warrants a fresh independent valuation.

GST registration is likely mandatory. If your SMSF's annual commercial rental income exceeds $75,000, GST registration is compulsory within 21 days of crossing the threshold. Structure your lease as "rent plus GST" from the outset to avoid retrospective complications.

Borrowed funds cannot fund improvements. Under an LRBA, only repairs and maintenance may be funded with loan proceeds. Improvements — including adding consulting rooms, procedure suites, or other clinic-specific infrastructure — must be funded from your SMSF's own cash reserves, and must not create a fundamentally different asset.

Conclusion

The ability to purchase your medical or allied health clinic through an SMSF and lease it back to your practice is one of the most strategically powerful financial strategies for self-employed healthcare professionals in Australia. For business owners that also have an SMSF, acquiring their business premises in their SMSF at market rates, and leasing it back to the business also at market rates, can present a real financial advantage. But the strategy's power is inseparable from its compliance complexity.

With SMSFs holding $109.7 billion in non-residential real property assets in the December 2024 quarter, it's clear that many trustees have already embraced commercial property. However, the BRP leaseback strategy isn't a set-and-forget arrangement. It requires annual valuation monitoring, rigorous lease enforcement, careful management of the repairs-versus-improvements boundary under any LRBA, and proactive GST compliance.

When you execute this strategy correctly, you effectively redirect your practice's rent payments into your own retirement savings, at concessional tax rates, with potential for significant capital growth inside a tax-advantaged structure. Those who execute it poorly face penalties, forced property sales, and — in serious cases — fund disqualification.

At 1Group Property Advisory, we work closely with healthcare professionals to structure, execute, and maintain compliant SMSF clinic acquisitions. Our data-driven research and conflict-free advice ensure that every aspect — from valuation to lease drafting to ongoing compliance — is managed with precision and expertise. We understand your unique position as a time-poor, high-income earner, and our strategic property investment approach is designed to build your long-term wealth while protecting your fund's integrity.

For a worked example of how this strategy operates in practice over a five-year period, see our companion article SMSF Property Case Study: How a GP Couple Used Their SMSF to Buy Their Practice Premises. For guidance on selecting the right professional team to execute this strategy compliantly, see Choosing the Right SMSF Adviser, Accountant, and Lender as a Healthcare Worker.

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