SMSF commercialQ: As a small business owner I have heard about the opportunity of creating a Self-Managed Superannuation Fund (SMSF) to purchase the commercial premises from which I currently operate my business. What do I need to consider?

A:  For many small to medium enterprises, it possible to transfer the owner’s super balance into a SMSF to help purchase a commercial property which is classified as business real property. The property can be leased to a member or a related party’s business of the SMSF.

Commencing a SMSF is a big decision in its own right and should be considered as part of your overall goals and objectives.  The amount of funds required to establish a SMSF has been debated and the relevant regulators have set minimum benchmarks. Clients with $400,000 to $500,000 in superannuation can achieve some excellent outcomes by commencing a SMSF to gain control of their retirement savings. In a recent Blog Post, Andrew Heaven outlines the key reasons you should consider before commencing a SMSF – click here.

An SMSF will incur additional compliance costs including, establishment costs, ongoing SMSF auditor’s costs, record keeping and administrative costs, annual tax return costs and ASIC compliance costs if using a corporate trustee. It is therefore important that you obtain financial advice to consider whether establishing a SMSF is the right decision for you.

Under the super laws, a SMSF can purchase a commercial property and lease it back to a member or a related party of the fund – including the member’s business[1].   An arm’s length lease arrangement is important when leasing property to a member or related party of the fund. The trustees need a documented lease arrangement between the SMSF and the business whilst the arm’s length value of the lease payments would need to be confirmed by a commercial real estate agent or determined by a registered property valuer[2].

Should the Australian Tax Office determine that the value of the lease payments is above or below the market value, then this can create taxation and compliance issues.

If you (or a related party) own the commercial property which is classified as business real property[3], the SMSF can purchase it from you (or a related party) at the current market value. Once the member (or a related party) receives the sale proceeds from the SMSF, this would allow repayment of business or personal debts (such as the home mortgage).

A SMSF can borrow to invest into commercial property providing the strict borrowing requirements are adhered to. You can consider partially funding the purchase with borrowings subject to finance approval and this being consistent with your long term goals and objectives. Undertaking a borrowing strategy does increase the risk involved as the repayment of the loan is directly linked to the financial success of your business.

An important consideration is the capital gains tax and stamp duty that will be incurred. Seeking taxation advice from your accountant is advisable and depending upon which state you live in, stamp duty concessions may exist.

Important considerations

  1. Your role as trustee – Your role as trustee of the fund is more involved than simply operating your business. This means you need to act in the best interest of the fund members at all times, and ensure the dealings with the related party is conducted on commercial arm’s length terms.
  2. Lease payments – The business must pay the ongoing lease payments to the SMSF regardless of the financial position of the business[4]. As trustee of the fund, you need to ensure the lease payments are up to date and the terms of the lease are enforced.
  3. Lack of diversification– Before you undertake the purchase of the commercial premises, you must have an investment strategy. This sets out your fund’s investment objectives and specifies the types of investments your fund can make. Purchasing one asset within the fund does not provide adequate diversification across different asset classes and needs to be reflected in the fund’s investment strategy. It also increases the risks involved should the business cease or the commercial premises fail to be leased in the long term.
  4. Succession planning– not only for the business but for passing on your superannuation to the next generation. Coupling the family business to your SMSF requires diligent consideration about what might happen in the future to avoid the premises being sold upon the death of a member in the SMSF. Providing the business with continuity is important. 

So what is next?

A SMSF and business can be a good mix if you follow the strict rules. It is important that you seek professional advice, as deciding whether to establish a SMSF, and then whether to purchase a commercial property through that SMSF can be complicated.

[1] As per s109 of the Superannuation Industry (Supervision) Act 1993
[2] Section 52 (6) (a)(iv) of the Superannuation Industry (Supervision) Act 1993 and Australian Tax Office Guidance – click here
[3] Refer to Self Managed Superannuation Funds Ruling SMSFR 2009/1
[4] As per s109 of the Superannuation Industry (Supervision) Act 1993