For business owners looking to acquire a commercial premises, buying through their Self Managed Super Fund can be a great way to create a tax effective loop that benefits both the business and builds wealth for the future. The business will pay rent to the super fund which is tax deductible and that rent is used to pay off the loan eventually leaving you with an unencumbered asset that can continue generating income in retirement or be sold to provide you with a lump sum. The rental income is taxable income for the super fund, however you will also be able to claim interest and other expenses as a deduction just as you would with a traditional investment property.
Here we will elaborate on key considerations for business owners, how commercial property investment works in self managed super funds, the entity structure including how bare trusts work and the lending and deposit requirements.
Key Considerations For Business Owners
Outside of their wealth building intentions, the key consideration for business owners deciding whether or not to buy a commercial premises for their business in a self managed super fund, should simply be whether or not they will need to leverage the property in the future. Buying in a SMSF is a Limited Recourse Borrowing Arrangement (LRBA) which essentially isolates the property from the funds other assets for protection and risk management. It also means that the property can never be leveraged for any other purpose eg. If you wanted to buy a second premises for the business or general investment, you could not leverage the equity in the SMSF property and would need to accumulate an additional deposit of at least 20% plus stamp duty and settlement costs. Additionally, if you needed to borrow money for your business, you would be unable to offer the SMSF property as security. There is a minor, uncommon exemption to this rule if the property is owned under an alternative structure which is explained below under proposed entity structure.
If it is determined that buying the commercial property in your SMSF is not suitable at this time due to the need to leverage the property in the short term or other tax considerations, you can still buy the property under an alternative structure such as a trust then sell the property to your super fund at a later date. This does not apply to residential properties but can be considered for commercial and other non residential properties such as farms where all ATO/SIS act tests are met. Stamp duty will apply at the full market rate and it is essential you discuss with your accountant and other advisors if this is right for you.
Entity Structures
There are 2 ways SMSF’s can invest in property – the most common is direct property investment which is a Limited Recourse Borrowing Arrangement (LRBA). The second is through syndicates with other investors or via a unit trust. Under a unit trust structure where your superfund is one of the unit holders, it is possible to obtain major bank finance (unlike direct SMSF lending which is now only provided through specialist non major lenders) and also potentially leverage the property for other purposes including additional properties or other business purposes, however you must meet dilution rules, ATO and SIS act requirements. This is generally only acceptable where there are multiple owners unrelated to each other.
The most common situation will be direct property investment via a LRBA. This is done through a combination of entities being your SMSF and a Bare Trust. Whilst you have a loan in place for the property, the Bare Trust will own/hold the property on behalf of the beneficiaries of the super fund and the title will be registered under the Trustee for the Bare Trust. This protects and isolates the property from the remaining assets of the super fund. Once the SMSF loan is paid off, the Bare Trust has served its purpose, is dissolved and the property is officially transferred into the super fund. Each property you buy must have its own Bare Trust, although it is generally ok to have a common trustee. The majority of lenders will now only allow a company/corporate trustee for SMSF lending as this assists with them having more streamlined lending policies in the unregulated/non consumer lending environment (a few will still allow individual trustees although we find we can achieve better interest rates with those who only accept corporate trustees). This means that if you are establishing a new SMSF and purchasing a property, 4 new entities will likely be established – the SMSF itself, a company to be the trustee for the SMSF (known as a corporate trustee), the Bare Trust and a company to be the trustee for the Bare Trust.
Lending & Deposit Requirements
LRBA’s are now only provided by non traditional lenders. The major banks ceased providing SMSF lending more than a decade ago due to significant compliance and administration requirements with the only exemption being unit trust structures with SMSF’s owning partial units in the trust. When it comes to interest rate, it is good to budget a rate 1-1.5%pa higher than normal investment rates you would find at a major bank. Some lenders will also charge a percentage based application fee, although many have now waived this requirement. Your broker can advise on the most competitive options available for you.
There are now many online LRBA/SMSF lenders with streamlined policies and some can consider low doc options for business owners where additional income support is needed. Most commonly though, the lenders look to achieve serviceability through a combination of only the proposed or existing rent + regular super contributions from salaries or your business. For full doc applications for established business owners, you will need to provide at least your last 2 years financials and tax returns plus general additional documents such as accountant certified copies of the SMSF and Bare Trust Deed, your ID, evidence of your super balances and proposed rental income.
As a general rule, only a 20% deposit + stamp duty and settlement costs is required, however if the property is specialised or particularly high value, occasionally you will require a 30-40% deposit + stamp duty and settlement costs. Some providers also need you to meet a post settlement liquidity test meaning there needs to be a percentage of cash remaining in the fund. This is becoming slightly less common now.
If you are purchasing a commercial property, it is also important to note that some properties will be subject to GST. Most funds will generally be able to claim all or most of this back post purchase but you will need to have the additional funds available upfront if GST applies. For the commercial property to be exempt from GST, it must be classed as a ‘going concern’ in accordance with ATO policies. When it comes to property, this will generally apply when the property has an active lease agreement in place at settlement that is being transferred to the new owner. This can include your businesses existing lease if you are buying from your current landlord or a lease you intend to terminate in the future upon expiry to move into the premises. Where there is no lease, GST generally applies.
There is a lot to consider when buying a commercial property for your business using your super fund which is why it is important you obtain the right tax, financial and lending advice upfront. Despite there being some complexity, it can be a great way to create a tax effective loop between your business and super fund to build wealth for your future retirement.
Get in touch with Alana to find out if SMSF property investment is right for you.
finance@fortunaadvisors.com.au
(08) 9240 4211