Owning a business property in an SMSF is a popular option for business owners. ATO data shows that in the December 2022 quarter, more than $87 billion in non-residential property assets were held by SMSFs, representing over 10% of all SMSF assets.1
Although you need to follow the rules to make it work, there are many good reasons to hold your business property in your SMSF.
Benefits Of Owning Your Business Premises In Your SMSF
SMSF Growth
Making lease payments to your SMSF will help you grow your balance. You can lease the property to a third party after you retire and supplement your retirement income. You also get increased cash flow and potential for capital growth as the property price increases over time.
By owning your business premises, you get greater control over your investments and the ability to manage your property more easily, as it belongs to you.
Tax Effectiveness
When your business property is in your SMSF, tax on income capital gains will be less in general than they would have been when owned by the business. This is because the earnings (including rental income) of an SMSF are taxed at 15%. When your business pays rent to your SMSF, the expenses are deductible. For corporations, the tax rate is 25%. As a result of holding your business premises in an SMSF, you save 10% on every dollar of tax.
When you retire and decide to sell your property, you won’t need to pay capital gains tax if you are over 60 and in the pension phase (retired). For example, if you purchased your premises 12 years ago for $700,000 and it’s worth $1.4 million now, none of the gain is considered taxable income if the property was held in your SMSF.
Another benefit of owning your business property in your SMSF is protection, as it will be more difficult for creditors to access assets in a super fund in case of business bankruptcy.
Considerations Of Owning Your Business Property In Your SMSF
While the potential benefits are substantial, you need to consider the potential downside.
Compliance Requirements
There is a range of compliance requirements if you purchase a property for your business or transfer a business you own into your SMSF. The property to be held by the SMSF must be a “business real property”, meaning that it is used wholly and exclusively for the business, so it can be a commercial or industrial property, warehouse, office, shop or farm. While the regulations allow purchasing from a related party, it must be done at fair market value, requiring that an independent valuation be carried out and recorded.
The commercial property in your SMSF must meet your fund’s investment strategy, especially regarding asset diversification, liquidity and return maximisation. If a commercial property doesn’t fit within the strategy, it may need to be updated.
Another important factor is how to borrow to acquire a property for an SMSF. Under SMSF rules, there needs to be a limited recourse borrowing arrangement (LBRA). Under this, the property acts as security for the loan, but the lender won’t get recourse to other assets in the fund if the loan is not repaid. If you use an LRBA to buy a commercial property, it must be a single acquirable asset (or a group of identical assets having the same market value). When you have properties on multiple titles (for example, commercial premises with a separate title for a car park), a bare trust is required for each title if they can be sold separately.
Also, the property needs to be held by a separate entity called a bare trust (also called a holding trust). Under this arrangement, the SMSF is the beneficiary of the bare trust, but the bare trustee – who cannot be the same as the SMSF trustee – acts as the registered holder of the property. When the loan for the property is repaid, the SMSF trustee becomes the legal owner of the property.
Besides the compliance factors, other points to consider include:
- Limited liquidity if you need to sell the property – unlike shares and other liquid assets, it can take time to sell a commercial property.
- Having a large portion of your SMSF assets in property means your fund is less diversified. If there is a downturn in the commercial property market, you could end up with less when it is time to retire.
- If the property is purchased under an LRBA, you cannot improve the property.
- Consider the fees when purchasing a commercial property, including legal fees, stamp duty, and property management fees.
- Usually, the lending criteria for a commercial property under an LRBA is stricter, including higher loan-to-valuation ratios than for residential property. You might only get a loan for 70% to 80% of the purchase price, so you’ll need to come up with a deposit.
Getting Advice On Owning Your Premises Through Your SMSF
You can reap the benefits of owning your business premises in your self-managed super fund, but you need to understand the details to make it work. At Equil Advisory, we specialise in making superannuation work for our clients.
Get in touch to discuss your SMSF goals and how we can help you reach them.
1 https://data.gov.au/data/dataset/self-managed-superannuation-funds
