According to the ATO, growth in the number of SMSFs averaged around 5% per year over the last 5 years. When you consider that SMSF’s account for over 32% or almost $700 billion of the superannuation market, you have to wonder who is leveraging this investment route, and why?
We often receive enquiries from small business owners many of which are medical and dental practitioners with respect to purchasing an owner-occupied commercial property through a Self-Managed Superannuation Fund (SMSF). We share our thoughts below in addition to interviews with relevant industry professionals that will address the pertinent points with respect to the treatment of an owner-occupied commercial property within an SMSF.
To the question of whether an SMSF is appropriate for an individual, there is no one size fits all answer, the answer depends on your specific financial requirements, funds available, personal and financial objectives in addition to your specific risk profile.
Advice on whether an SMSF is appropriate for your circumstances can only be provided by a financial adviser or an accountant operating under an AFSL license.
Mr Mathew Holden, Partner at Brentnalls SA advises
“whilst the benefits of an owner-occupied commercial property being held in an SMSF are significant, what many fail to understand is that the burden of compliance shifts to the trustees and it is their sole responsibility and not that of their accountant or financial adviser to ensure the fund remains compliant. Failure to keep the fund compliant may result in significant penalties as SMSF’s are regulated by the ATO”.
The benefits of going down the path of an owner-occupied commercial property regardless of the structure it is purchased in include:
With respect to the tax advantages of owning a property in an SMSF, Mr Holden explains “there are significant indirect tax benefits that result from owner occupied properties in an SMSF Structure, these include but are not limited to:”
“If there are borrowings associated with the commercial property, the rent paid to the SMSF by the business is a pre-tax expense, meaning it is tax-deductible to the business.”
“When the rent is deposited into the fund, at most the fund will pay 15% income tax on the rent (almost half the tax rate payable by companies), in theory, the remaining funds can be used to pay off both the interest and principal components of the loan. In simple terms, there is more money available to allow for accelerated repayment of debt when compared to owning the property outside of an SMSF.”
“One of the biggest changes to Superannuation in the last decade has been the restriction placed on contributions to Superannuation in general, currently limited to $25,000 per individual pre-tax. This has proven to be a major obstacle to accelerating Superannuation balances tax effectively”
“When an owner-occupied property is owned by an SMSF, it provides an opportunity to bolster the funds balance through the continual payment of rent which as described above is a pre-tax expense to a business. The result is the creation of a mechanism to contribute more of your business income pre-tax into Superannuation effectively by-passing the contribution limits, should the property have no debt this effect would be magnified.”
Fit-outs are often an imperative part of a medical or dental practice and any restrictions in the ability to lease or install a fit-out may make a property purchase unviable. There is a lot of conflicting information on what can and can’t be done to a property inside Superannuation explains Mr Rocky Singh of Australian Business Tax.
“…whilst this question may seem straightforward, it is one that many get horribly wrong, in the simplest of terms an SMSF may pay for the fit-out of a related party tenant. If an SMSF were to pay for a fit-out the amount of rent payable would need to be adjusted accordingly to account for the extra benefit gained by the tenant.”
“Furthermore, the trustees must only pay for items that fall under the definition of business real property. The most appropriate way of determining this is to apply the following test; if you were to sell the property, would the item be included as part of the sale of the freehold land? If the answer is no, then the item is not a fixture and therefore not business real property.”
“There are also comprehensive rules around what improvements are permitted to be made to a property held in an SMSF, the criteria is defined by ATO Ruling SMSFR 2012/1, generally speaking, If the single acquirable asset held under the Limited Recourse Borrowing Arrangement (LRBA) is replaced in its entirety (same or different type) that replacement asset is not permissible under the borrowing provisions, then super fund will contravene the borrowing legislation. An example of new assets being created include:
“From a tax perspective, a business and not the SMSF will traditionally pay for the fit-out as it is a depreciating item and claiming it against an individual or companies tax rates are far more attractive than claiming these items in low taxed environment such as superannuation. This methodology also provides the owner occupier with the opportunity to lease the fit-out and preserve funds. ”
Mr Singh also stresses “the ATO has stated that an improvement that results in the addition of fixtures to a property may be considered a contribution. A simple way to avoid this issue is by using a make good or retention of ownership clauses which would manage this issue.”
This question is multifaceted and beyond the scope of this article. Mr Holden writes “the appropriateness of contributing or purchasing a commercial property from a related party is complex, if however, such a strategy is deemed to be appropriate there are a number of ways in which it can be affected, it is worth noting that applicable CGT and Stamp Duty costs may be triggered by such a transfer. It is imperative that advice is sought from an accountant, financial adviser and solicitor to determine if such a strategy is appropriate for your circumstances.”
There are two types of agents in the market, selling agents and buying agents. Selling agents represent the vendor and are trying to achieve the best price and terms for them, whereas the Buyers Agent is working for the buyer, doing the same in return for their clients. The advantages to engaging professionals to represent you in a purchase include:
As you can see from the information above there are so many factors that are to be considered when trying to determine whether buying an owner-occupied property through an SMSF is appropriate. The most important thing is to ensure you surround yourself with a professional team that can provide you with a strategic framework specific to your circumstances and then assist you in executing it.
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