Can my SMSF buy a business property?

Answer: Yes but there are some things to consider.

Self-managed superannuation funds (SMSFs) offer a significant level of freedom in choice of investment options. Those choices are even greater if you happen to be a small business owner.

An SMSF can be used to enhance business through the acquisition of business premises such as commercial or industrial property. Where the SMSF doesn’t have sufficient fund to buy the property upfront – the fund can borrow from the bank using a limited recourse borrowing arrangement.

Why buy your business premises using your SMSF?

The most significant benefit of buying your business premises using your SMSF is the fact that ‘in-super’, transactions are subject to a much more favourable tax treatment. For example:

1. Rental income from property in a SMSF will be taxed at 15%, compared with rates up to 45% that a regular investor could be paying.
2. Once you start to use your SMSF to provide your pension, rental income from the property will be tax free.
3. The cost incurred in purchasing and managing the property (interest, depreciation, rates, insurance etc.) could very well produce a negative income that you can offset against other income to reduce your tax even further.
4. You can maximise your super contribution. These contributions can then be used to repay any bank loans associated with the property. So effectively you are getting tax deductions for your super contributions which is used to repay the bank.

Things to consider when purchasing business property using an SMSF

There are a few specific conditions you need to be aware of if you’re considering this:

1. Commercially competitive: The terms of the lease must be commercially competitive. You aren’t allowed to lease it back for “mates’ rates” to give yourself a financial advantage. The ATO monitors and audits SMSFs regularly to ensure all arrangements are compliant.
2. No rental holiday: When things get tight and there’s an income downturn, you aren’t allowed to skip the rent for a payment. The payments must be made on time, every time, in full.
3. Valuations: Compliance of the SMSF relies on regular valuations being done on the commercial property. This can be time consuming and requires a lot of paperwork.
4. Sole purpose test: The investment must satisfy the ‘sole purpose’ test, which is that the funds sole purpose is to provide retirement benefit to the fund’s members.

An example of how this works

Tom and Linda Logan operate a successful local cafe business. The business operates from a leased building but they feel they are now in a position to buy the premises.

The Logans have considered purchasing the premises directly in joint names. While that structure has its advantages, there are factors that need to be considered. One is that rent will be paid directly to Tom and Linda, adding to their taxable income. This reduces the opportunity for them to receive much else from the business in terms of salary or profits in a tax-effective manner.

Tom and Linda also need to think about retirement. Will their children be ready to take over the business ownership? Or will they have to rely on continuing rental income from the property to meet their living expenses in retirement?

An SMSF could instead be used in this arrangement:

The SMSF owns the business premises and receives rent from the business. Super funds pay tax at a flat rate of 15%, so this is likely to be an improved outcome. It also means that Tom and Linda may be able to receive more salary and profit from the business without pushing their tax rate too high.

When the fund goes to pension phase, the value of this structure continues. Super pay no tax on income or on other gains on assets used to pay pensions to their members. This may be extremely valuable whether the Logans retain the property (and receive rent into the SMSF) or sell it (and make a capital gain).

IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (QLD) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (QLD) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (QLD) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (QLD) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.