If you are not familiar with SMSFs, we recommend reading ‘A Beginner Overview To Borrowing For SMSF Property’ first before coming back to this article.
Generally, the property held by the SMSF must:
– meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
– not be acquired from a related party of a member
– not be lived in by a fund member or any fund members’ related parties
– not be rented by a fund member or any fund members’ related parties
However, if the property satisfies criteria known as ‘business real property’ conditions, then new opportunities present itself. Put simply, business real property is land and buildings used wholly and exclusively by a business.
Business real property can:
1. Be acquired from a related party
SMSF trustees are usually prohibited from acquiring assets from fund members or their related parties. However, by satisfying business real property conditions, the SMSF can purchase from property already owned by related parties at market rate.
2. Be leased out to a related party
In-house assets can’t be more than 5% of the SMSF, which includes prohibiting the asset from being leased to a related party. Once again, business real property provides an exception to the rule and can be leased out to your own or a related party’s business.
These exemptions present business owners with a unique opportunity to leverage super funds into commercial property that could benefit their own business. On top of the usual tax benefits that come with SMSF, here are a few pros and cons specific to the commercial SMSF strategy.
Key benefits for the business owner:
Rent pays off your own asset:
One of the biggest attractions is leasing out the commercial property to the business. The tax-deductible rental expense owed by the business would be paying off a tangible asset under your own SMSF rather than paying off someone else’s investment.
Secured tenancy:
Since the property is held under your SMSF, you can guarantee your business’s tenancy for the long term without sudden spikes in rental price outside of market rates.
Key considerations as a business owner:
Strict rental conditions:
Although you have control of the property under your SMSF, you are obliged to rent out the property at market rate. Strict rental conditions must be met.
Renovations and repairs:
Upkeep of the commercial property needs to be taken from the SMSF fund and cannot be drawn from your own personal funds.
Conclusion:
Understanding the criteria and regulations, such as the ‘sole purpose test’ and business real property conditions, are crucial for SMSF trustees to navigate this strategy effectively.
Overall, with careful planning, professional guidance, and a clear understanding of the opportunities and considerations, SMSF property investment can be a valuable addition to retirement planning, offering both financial growth and strategic benefits for business owners.
Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives.
