As a business owner, you may have heard of the benefits of using a self-managed superannuation fund (SMSF) to own commercial property which you can then lease to your business. An SMSF is the only way you can use your superannuation benefits to purchase direct property. You could either purchase the property from an unrelated party or transfer/sell property you own personally to an SMSF so long as it satisfies the business real property conditions.
In this article, we explore the different ways you can use your SMSF to buy commercial property.
Generally, there are a number of benefits to using your superannuation to invest in and hold commercial property
Let’s list a few:
- Superannuation income is taxed at 15% while you’re still working and at a rate as low as 0% when you’ve satisfied special conditions in retirement age. The concessional tax rates apply to both the rental income as well as any capital gains resulting from the sale of the property.
- If you’re currently renting your business premises by using your superannuation to purchase them, it means you are paying off your own assets as opposed to paying off someone else’s investment.
- Holding your business premises within an SMSF can provide asset protection against any future claims or liabilities that could result from operating your business. That means if your business goes belly up, your property is safe.
- As the property is held in your SMSF, you can guarantee and secure your business’s tenancy for the longer term.
Let’s now look at some of the common options available for owning commercial property in your SMSF.
Option 1 – Your SMSF acquires commercial property via a cash purchase (otherwise known as an outright purchase)
If you have enough cash available, the SMSF could purchase the property outright. This is the simplest form of ownership. The SMSF could purchase the property from either an unrelated third party or it could also purchase a property you currently own so long as it satisfies the business real property conditions.
Your business will need to pay market-rate rent to your SMSF and all expenses must be paid from the fund. A lease agreement should be drawn up, which will contain the details of the arrangement. It’s important to note that the property must always remain unencumbered.
Option 2 – Your SMSF acquires commercial property from you via an in-specie transfer
If you currently own business real property you could transfer this property as a contribution to your SMSF. Careful planning is needed for this option to ensure you don’t breach the superannuation contribution caps and you may need to consider any capital gains that could arise from this transfer.
Just as with option one, to satisfy the superannuation rules the property can’t be encumbered, your business will need to pay market-rate rent to the SMSF and the SMSF will need to pay for any property expenses.
Option 3 – Your SMSF acquires commercial property indirectly via a related non-geared unit trust
With this option, a unit trust is set up and the SMSF invests cash into the unit trust in return for a percentage ownership. The other units can be purchased by you or any other related party. For example, you want to purchase an $800,000 commercial property. A unit trust is set up and your SMSF buys 50% of the units ($400K) and you personally purchase the other 50% ($400K). The property is owned by the unit trust. Both you and the SMSF indirectly hold the property via your 50/50 ownership of the unit trust shares.
Your business will pay rent to the unit trust and the unit trust will distribute the net rent (post expenses) proportionally as per ownership to you and your SMSF.
It’s important to note that in this structure the property can’t be geared. Additionally, rent must be at market rates and all expenses need to be paid by the unit trust.
Option 4 – Your SMSF acquires commercial property as tenants in common
Similarly to option three, you‘re able to purchase a property as tenants in common with your SMSF. For example, your fund could purchase 50% of the property using the fund’s cash and you or another party could purchase the other 50% with your own money.
It’s important to note that all income and expenses need to be split as per the proportionate ownership on the title, and again, the property must remain unencumbered.
Option 5 – Your SMSF acquires commercial property via a limited recourse borrowing arrangement (LRBA)
Where your superannuation benefits aren’t enough to purchase the property, your SMSF has the option to borrow money to purchase the property via an LRBA. These loans require an additional structure to be set up as the property must be held in a bare trust while there is a debt attached to it. One of the benefits is that the lender only has limited recourse to the property and no other SMSF assets.
If you’re thinking about going down this path, you should consider:
- Speaking to a broker or lender to check if your SMSF will be able to meet the lenders servicing requirements
- Getting a good understanding of the rules surrounding the restrictions of owning property via an LRBA
This option is far more complex than the others, so we recommend careful planning before going down this path.
As with all the different options available, the SMSF must comply with the superannuation rules at all times. This is ultimately the responsibility of the SMSF members.
There are a lot of factors that need to be considered to determine if any of the options above suit your personal circumstances.
That’s where we come in. The BlueRock family provides a holistic service that will help you determine the most appropriate and pain-free approach to owning property in your SMSF. If you’d like to find out if an SMSF is the right vehicle for owning your business premises within the superannuation environment, give us a call.