For the last few years direct property investment has been very popular with the SMSF, even with the interest rates being higher than borrowing in your own name.
This is especially true when it comes to commercial properties, and we have had many clients utilise their superannuation and purchase their offices, clinics or warehouses in the SMSF.
What is a commercial property?
The land or property being acquired must satisfy the ‘business use test’, which means it must be ‘used wholly and exclusively in one or more businesses’ carried on by an entity. A farm, with a residence as part of it, can meet this definition if it is being used for primary production (not domestic or private purposes) if the dwelling has an area of land no more than 2 hectares.
What are the benefits of purchasing commercial property in your SMSF?
Asset Protection
Having the commercial property separate from your business assets or from your personal assets add another layer of protection.
Having a property in your superannuation fund makes it the safest place, where none of your creditors can touch it
Tax savings
Complying SMSF’s pay only 15% tax, whereas you may be already in the 47% tax bracket. This means the rental income in SMSF leaves you (the retirements funds) with more cash to invest.
The SMSF’s also get CGT concession of 1/3 if the property is held over 12 months.
Transferring commercial property into SMSF
If you or your business entity own a commercial property that is used in your business, you may be able to transfer the property into your fund with minimal tax (where small business CGT concessions apply)
What are the disadvantages of purchasing commercial property in your SMSF?
Just like with any other investment, you need to ensure that this aligns with your investment strategy and the ultimate goals.
The interest rates are generally higher, and there are few limited recourse borrowing providers so you need to engage experienced professional.
If you do need to borrow, there is additional cost of setting up a bare trust and corporate trustee. Although this is assessed on a case by case basis, you need to obtain statement of advice and we only recommend these if the benefits far outweigh the costs.
Frequently asked questions
Yes, as long as it is at market value.
Yes, but the lease must charge market rent and be in line with terms and conditions in a typical commercial lease. All rental payments must be paid as outlined in the lease arrangement, with no discounts or concessions. Rental must be paid promptly and in full on the due date as if your business was renting from a private landlord.
If rent from the lease doesn’t cover the LRBA loan repayments, the SMSF will need to make up the difference from super contributions.
Once the LRBA loan has been paid off, the property title can be transferred to the SMSF from the bare trust. This can usually be done without incurring taxes and other liabilities, provided the LRBA was set up appropriately.
No, whilst the SMSF can borrow for the property purchase and costs via bare trust & limited recourse arrangement, SSMF is not allowed to borrow for improvements.
