Legislation allows business owners to purchase a retail, commercial or industrial property through their SMSF and rent that property back to their business.
Those who are currently renting an office, warehouse, retail storefront or other business premise, or who have an existing commercial property under company title, might benefit from investigating
this investment option.
Key Benefits of Buying a Commercial Property through your SMSF:
- Your business is paying rent to your future self and not a landlord.
- The property loan ‘leverages’ your superannuation fund.
- Investment earnings (rent) is taxed at 15 per cent as opposed to your marginal tax rate if the
asset was held outside of super. - Capital Gains Tax (CGT) on the commercial property is only 10 per cent if it is held for longer
than 12 months, or 15 per cent if held for less than 12 months. - Once fund members enter ‘pension phase’ and/or meet a condition of release, the asset can
be sold down without capital gains tax.
The information in this article does not apply to residential property, which you cannot lease back to you or your business to live in, even if you also run your business from home.
The Australian Tax Office (ATO) states that super funds, and the tax concessions they receive, should not provide financial benefit to you or anyone else – other than increasing the return to the fund. However, there are occasional exemptions such as a primary production business that also has a house on it.
Purchasing a commercial property through your SMSF and renting it to your business is allowed as it complies with the ATO’s investing at arm’s length rule stating that any investments made by your
SMSF must be made at a commercial arm’s length basis.
And according to Peter O’Malley, Director of Manly-based financial advisors Future Wealth Group,
this applies regardless of the business structure.
“Companies, sole traders, partnerships, and other business structures can take up a lease agreement on the SMSF business real property as long as they meet the other criteria,” he said.
Part of that criteria requires that you satisfy several superannuation and tax rules, including but not
limited to:
- The property must also not be acquired from, lived in, or rented by a fund member or any
fund member’s related parties. - It must be classified as business real property which “generally means land and buildings
used wholly and exclusively in a business”. - The property must be leased to your business at the market rate – no discounts.
- It must be a single acquirable asset. If there are multiple titles, you will require a bare trust
(see below) for each title. - Major renovations to the property are not permitted until the loan is paid off. Any
improvements must be paid for with SMSF funds rather than borrowed money.
Can you sublet part of the property to other businesses?
It is possible to sublet part of the commercial property to other businesses, for example renting out
desks, however there are some caveats, according to Peter.
“Any activities conducted in an SMSF need to firstly meet the ‘Sole Purpose Test’ for it to maintain
its compliant status,” Peter said.
The Sole Purpose Test is to ensure that regulated superannuation funds are maintained for the core
purpose of providing benefits to fund members upon their retirement, or to their dependants on the
event of their death.
If the trust deed allows the Business Real Property to sublet under a separate lease agreement, it
must be made at commercial terms with a lease in place at market rates, Peter said, adding that
most trust deeds are templated to accommodate this.
Other considerations:
- Not all lenders will offer commercial property SMSF loans, and those who do will charge
higher interest rates and require a personal guarantee. Shop around for the most attractive
loan and conditions or engage a broker who has proven commercial SMSF experience, such
as Peter from Future Wealth Group. - Lender loan-to-value (LTV) ratios are more conservative, and you will require a deposit of at
least 30 per cent of the purchase price. - There are numerous traps for young players that can leave you with large stamp duty fees if
the purchase is not structured correctly. Engage a lawyer, accountant and financial advisor
with specific and demonstrable experience in purchasing and leasing commercial properties
though SMSFs.
Administration Costs:
Peter said that accountant fees might range from $1800 to $4000 for SMSF establishment while
ongoing accounting fees might range from $2000 to $4000 per year depending on complexity. “Holding [bare] trust establishment can also vary from $1000 to $2,500 and conveyancing costs will
be around $2000 to $3000,” he added.
“Initial fees for financial advice and investment strategy can start from $2500, while ongoing costs
vary from $4000 – $6000 per year depending on complexity and funds under management.”
And of course, any other costs traditionally associated with managing an investment property will
also apply such as levies, strata management and property management.
LBRAs and Bare Trusts
The legislation requires that SMSFs borrow funds for commercial property assets in a limited recourse borrowing arrangement (LBRA) which serves to protect your other fund assets in the event of a default on the commercial property loan. That is why lenders require a personal guarantee as
security.
The commercial property asset will be owned by a ‘bare trust’, a separate entity that cannot be the same as the SMSF trustee.
Ensure you obtain legal and financial advice when setting up a bare trust for an LBRA as rules vary between states and territories and getting it wrong can be very costly.
The advice in this article is general in nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.
See also The Complete Guide to Investing in Commercial Property
