One of the big advantages of setting up your self-managed super fund is the ability to make investments the way that suits you. For some this includes property.
If you’re thinking about purchasing commercial property through your SMSF, it’s important that you understand exactly what’s involved.
Contact Liston Newton Advisory today to discuss your SMSF investment options. Your adviser will provide you with expert support and guidance, and help you determine whether commercial property investment is right for you.
Step into one of our offices in Geelong, Mallee, Malvern, the Gold Coast, Port Macquarie or Melbourne. Or, if you'd prefer, we'll be happy to set up a virtual consultation.
Advantages of buying a commercial property
There are some distinct advantages to buying commercial property through your SMSF:
- The 15% superannuation income tax rate makes it a tax-effective option
- Grow your SMSF quicker by paying rent to yourself, not a landlord
- A clever way to pay off your assets. For example, you can hold your business premises in your SMSF name and rent it out to your business. More on this later.
- Increased asset protection, as your business is a separate entity to your SMSF
- Secure tenancy in your property, as it’s held by your SMSF
Who should consider buying commercial property through their SMSF
There are two specific groups of people who will benefit from this strategy: business owners, and medical professionals who run their own clinic.
As we’ve covered before, SMSFs are particularly useful for business owners. The flexibility of this structure allows you to purchase your business property through your SMSF.
As an example:
- You purchase an office for your business. You borrow the money within your SMSF, and buy the office under your SMSF name. Your SMSF now owns this property.
- Now that your SMSF owns the property, it rents the space out to your business. Your business then pays rent to your SMSF — and your business can claim this rent as a business expense.
This means that your SMSF is using your rent to pay off the loan, and your rent goes directly to your SMSF as income.
Buying medical premises is a very popular strategy for medical professionals, notably doctors and dentists.
In a medical practice where there are a number of medical professionals working together, each medical professional will likely have a considerable amount in their super. This gives them the flexibility to diversity their super assets into commercial property.
- Three doctors work together at a medical practice. They each pay a 30% service fee that covers administration expenses like rent, reception, and office facilities.
- An opportunity comes to purchase the premises they’re working in. After consulting with their accountant and financial adviser, the doctors decide to set up a unit trust. This unit trust borrows money to buy the premises.
- Each doctor has an SMSF, and each SMSF holds 33.3% of the units in the unit trust. When they pay the 30% service fee each month, this money is deposited into the unit trust, which is then distributed between their SMSFs.
They each then receive a tax deduction on their medical business, and the rental income in their SMSF falls under the low tax rate of 15%.
How buying commercial property through your SMSF works
There are a number of steps involved to get started in the SMSF property market.
- Ensure you have the correct balance for a commercial property purchase. If you’re buying the property outright, you will need the full cash amount in your SMSF, plus stamp duty (approximately 5%).
- If you’re borrowing to buy a commercial property, you should expect to have a deposit of between 30%—40%, plus stamp duty. You’ll also need extra cash to cover legal expenses and ongoing expenses like rates, strata fees, and insurance.
- If you’re borrowing to buy a commercial property, it needs to be under a limited recourse borrowing arrangement (LRBA). This is beneficial for SMSF members, it protects your SMSF assets from your lender if the property loan goes bad.
- To set up an LRBA, first you need to set up a bare trust within your SMSF. This is essentially a separate trust within your SMSF that isolates the commercial property investment away from other investments.
- Select the property you want to purchase, and make sure you can actually afford it, either via lending or a cash payment. When you succeed in purchase the property, ensure you sign the contract in the name of your SMSF.
- Set up a commercial lease arrangement and document it with a lease agreement. The good news about commercial property is that you’re permitted to lease the property to whoever you want, as long as the lease is done at market rates. This includes your own business.
- Congratulations! You’re now leasing a commercial property via your SMSF.
But remember that you still need to abide by the rules each year. You still need to make sure the correct amount of rent is paid on time each financial year, and your SMSF remains compliant.
SMSF property purchasing options
[td]Option 1. Your SMSF acquires commercial property via a cash purchase (otherwise known as an outright purchase)[/td]
[td]This is the easiest method. There’s no need to set up a separate bare trust, you simply purchase the property and pay the additional stamp duty, all with cash. This option suits individuals with large amounts of cash in their SMSF.[/td]
[td]Option 2. Your SMSF acquires commercial property via an LRBA[/td]
[td]For this option you need to set up a bare trust within your SMSF. Then you must get approval from a lender to borrow within your SMSF. You’ll need approximately a 30%—40% deposit.
The lender will also assess your SMSF contributions history, and the terms of the rental income, to determine whether they will lend or not.
This option suits people with a lower balance who can’t afford an outright purchase. However, you would still need at minimum $500,000—$600,000 in your SMSF to make it work.[/td]
[td]Option 3. Your SMSF acquires commercial property indirectly via a non-geared unit trust[/td]
[td]Set up a unit trust outside of your SMSF. The SMSF buys units in the trust and transfers cash to the unit trust. The unit trust then purchases the commercial property without borrowing.
An SMSF member may choose to own all the units, or may partner with others to buy some of the units, either inside or outside their SMSF.
This option suits SMSF members who want flexibility in transferring ownership later on. For example, the same person could own 50% of the units in their SMSF, and 50% of the units in their family trust. They can then choose to sell some of these units to another party at a later date.[/td]
[td]Option 4. Your SMSF acquires commercial property indirectly via a geared unit trust[/td]
[td]This option is similar to Option 3, however in this instance the unit trust borrows to buy a commercial property. If borrowing occurs, this means an SMSF member can’t own more than 50% of the units in the trust.
This option suits SMSF members who don’t have enough cash for the unit trust to buy the property outright, but have someone willing to partner with them.
[td]Option 5. Your SMSF acquires commercial property from you via an in-specie transfer[/td]
[td]A commercial property owner may choose to sell the property to their SMSF. For example, a 65-year-old business owner may own his business premises through his business, and he’s selling the business. He can sell the business to another person, and then have his SMSF buy the premises from his business.
This would mean he can continue to rent the business premises to the new business owner, but receive the rent tax-free in his SMSF.
Contact a Liston Newton SMSF adviser to discuss the option that best suits your situation.
Other considerations when buying commercial property through an SMSF
Renovating your property
Under an SMSF you have to be careful when renovating your property. Simple repairs and maintenance can be paid with borrowed money.
Significant renovations need to be funded by cash directly available in your SMSF. This can’t be done through a loan, or borrowed money.
Under an LRBA you’re not allowed to make substantial renovations or changes to the property. Renovations that significantly change the asset from its original purchased state require a new LRBA.
Purchasing the property in the right name
Your new property must be purchased and held in the name of your bare trust’s trustee. Everything in the purchase, from the details on the contract to the name in the certificate of title, must be under this name. So make sure you set up your bare trust before you buy the property, otherwise you’ll face costly stamp duty fees later down the track.
Being mindful of single acquirable assets
A single acquirable asset requires that if a property runs over more multiple title, then a bare trust, trustee, and LRBA must be established for each title.
The ATO clarifies these situations specifically.
Single LRBA situations
- House and land package, or completed ‘off the plan’ property
- Apartment with a separate parking space
- Option (only) to purchase a house
- Factory that runs over multiple titles
Multiple LRBA situations
- Purchasing a block of land, with a house decided in the future
- Fully furnished serviced apartment, as the furniture is considered a separate asset to the apartment
- Farmland featuring multiple titles
- The seller may be selling two titles together, despite the fact they can sell them separately
Be aware of fees and charges
Purchasing, owning, and selling an SMSF property comes with substantial associated fees and charges. If you’re not careful, these can make a dent in your SMSF. To combat these fees, it’s crucial that your fund’s income covers the outgoing costs, and also allows for growth.
With an SMSF, as it’s your fund, people often think that they can repay themselves with money they’ve made as personal contributions. This isn’t possible. An individual can certainly use part of their own money to help purchasing the property. However, the ATO considers this a personal super contribution, so it can’t be accessed until the individual reaches preservation age.
Getting the right advice when buying commercial property through an SMSF
When it comes to SMSF property purchases it’s important to get advice from a financial adviser that knows what they’re doing.
At Liston Newton Advisory you get expert, tailored advice, that comes with the benefit of over 40 years’ experience. And with the SMSF Adviser 2018 Multi-Service Firm Of The Year award under our belt, our results speak for themselves.