Self-managed super funds (SMSFs) offer Australians a way to take control of their retirement savings. While there are many options for investing with your SMSF, one popular strategy involves investing in commercial property. This can be a great option for those looking to build a retirement nest egg or fuel business expansion. However, navigating the process requires understanding the rules and considerations.
An SMSF is a private superannuation fund regulated by the ATO that allows members to manage their own retirement savings. Unlike traditional super funds, SMSFs provide greater control over investment decisions, including the purchase of commercial property.
Can I Buy Commercial Property with my SMSF?
The good news is, yes! An SMSF can be used to directly purchase commercial property, unlike residential property which faces stricter limitations. This opens doors for two main scenarios:
Investing for Retirement: The commercial property is leased to a separate entity, generating rental income that flows into your SMSF for future benefit.
Owning Property for Your Business: The SMSF can purchase a property your business operates from. This allows you to pay rent to the fund, essentially building equity within your super. It is however important that you get professional advice; the rent paid must be at the market rate and must be paid promptly and in full at each due date.
Benefits of Using an SMSF to Buy Commercial Property
There are a few benefits of using an SMSF to buy commercial property, and it certainly is worth considering if you already have an SMSF or are looking to set one up.
- Tax Efficiency: SMSFs benefit from concessional tax rates. Rental income from commercial properties is taxed at 15%, and capital gains on properties held for more than 12 months are taxed at a reduced rate of 10%.
- Leverage: SMSFs can borrow money to invest in property through a limited recourse borrowing arrangement (LRBA), allowing for larger investments without needing to have the full purchase price upfront.
- Asset Control: Members have direct control over property management decisions, enabling them to tailor investments to suit their specific needs and risk profiles.
- Business Premises: Business owners can purchase their commercial premises through their SMSF, allowing the business to lease the property from the SMSF at market rates. This can lead to rental income for the SMSF and potential capital growth to sell further down the line. The ATO enforces strict regulations for SMSFs and property ownership. Here are some key factors to remember:
- Sole Purpose Test: The property’s sole purpose must be to provide retirement benefits for fund members. This means you or relatives cannot live in it, nor can your business use it below market rent.
- Related Party Transactions: Purchasing from or leasing to related parties is allowed, but only at fair market value with proper documentation.
Funding the Purchase: An SMSF can buy property outright with cash or borrow funds from a limited recourse borrowing arrangement.
Considering the Options: Cash Purchase vs. Borrowing
- Cash Purchase: This is the simpler route. The SMSF uses its existing funds to buy the property. There are no loan repayments, but a large initial investment is needed.
LRBA: If cash is limited, borrowing allows you to leverage your SMSF’s future earnings. LRBAs come with stricter rules and involve lenders specialising in SMSF loans.
Steps to Purchase Commercial Property with Your SMSF
1. Establish and Structure Your SMSF
Before purchasing property, you need to set up your SMSF correctly, ensuring it meets all legal requirements and is registered with the ATO. The SMSF must have a trust deed, and the trustees (either individual or corporate) are responsible for making investment decisions.
2. Develop an Investment Strategy
Your SMSF must have a documented investment strategy that outlines how the fund will achieve its investment objectives, including considerations of risk, diversification, and liquidity. This strategy should explicitly include the purchase of commercial property if that’s the intended investment.
3. Ensure Compliance with the Sole Purpose Test
Investments made through an SMSF must comply with the “sole purpose test,” meaning they must solely provide retirement benefits to the fund’s members. Purchasing property for personal use is prohibited, but buying business premises or investment properties is allowed.
4. Limited Recourse Borrowing Arrangement (LRBA)
If the SMSF needs to borrow money to buy the property, it must do so through an LRBA. This arrangement ensures that if the SMSF defaults on the loan, the lender’s recourse is limited to the property itself, protecting other assets within the fund.
5. Conduct Due Diligence
Thoroughly research and evaluate potential properties. Consider factors like location, potential for capital growth, rental yield, and any associated costs such as maintenance and management fees.
6. Engage Professionals
Purchasing a property through an SMSF can be complex, so it’s crucial to seek advice from professionals such as financial advisors, accountants, and legal experts who specialise in SMSFs. They can help ensure compliance with all regulations and maximise the benefits of the investment.
7. Purchase and Management
Once you’ve selected a property and secured financing, proceed with the purchase. The property must be held in trust for the SMSF, and all transactions should be conducted at arm’s length, ensuring market rates are applied for any leases to related parties.
Risks and Considerations
While purchasing commercial property through an SMSF offers many advantages, there are also risks and considerations to keep in mind:
- Liquidity: Property is an illiquid asset, which can pose challenges if the SMSF needs to quickly access funds.
- Diversification: Concentrating a large portion of the SMSF’s assets in a single property can increase risk. It’s important to maintain a diversified investment portfolio.
- Compliance and Costs: SMSFs are subject to strict regulatory requirements and ongoing compliance costs. Non-compliance can result in significant penalties.
- Market Fluctuations: Property values and rental income can fluctuate, impacting the overall performance of the SMSF.
Buying commercial property with your SMSF can be a smart move for business owners and investors seeking control, tax benefits, and potential growth. However, it requires careful planning, thorough research, and adherence to strict regulatory requirements. By understanding the process and seeking professional advice, you can make informed decisions that align with your retirement goals and investment strategy.