Commercial-Premises-2-jpeg, Walker Wayland

Oct 2017 3 Minutes

Should your SMSF own your business premises?

If you are operating your own business through commercial premises and have thought about purchasing a property to operate from, then the are a number of options including personal ownership, ownership through a trust or company or even though your own self-managed superannuation fund (SMSF).

Commercial properties are one of the most popular investments within an SMSF and can be purchased either from an independent third party or from a related party (known as an in-specie contribution). If purchasing or transferring from a related party it is important to ensure that an independent valuation is obtained.

A SMSF can lease commercial premises to unrelated businesses, but it can also lease premises to a related party. If leasing to a related party, it is important that the business pays a commercial lease amount and on a regular basis. An independent lease value should be ascertained by a suitably qualified valuer.

Although the changes to superannuation from July 1, 2017, which reduce, or eliminate, the amount of contributions people can make to superannuation on an annual basis may mean that investing in commercial property is less attractive to SMSFs. While the changes will certainly make it more difficult to finance the acquisition of such large assets, such investments shouldn’t be dismissed entirely, especially if it meets the fund’s overall investment objectives and the retirement aims of its members.

When considering acquiring a commercial property it is vitally important that proper planning is put in place and appropriate tax and financial advice is sought. For example, if you are able to utilise tax concessions such as the small business capital gains tax (CGT) concessions and rules pertaining to superannuation which change on a regular basis.

Consider the scenario below.

Background

  • Mavis is 35 years old and married to Max (38 years old)
  • Operates a gift shop along a suburban rental strip with excellent exposure to passing trades
  • Currently rents her shop from Bob
  • Bob wishes to sell the shop and asks Mavis if she is interested in buying it
  • The building is valued at $450,000

Opportunity

  • Mavis and Max want to secure their future and retirement
  • They believe the value of the property will increase substantially in the future
  • Would rather purchase the property to secure their tenancy & location and don’t want to pay rent to a third party
  • They both earn substantial, secure income

Problem

  • Mavis and Max have a large mortgage and little equity in their home
  • They have little in other assets except for $250,000 in a retail super fund and $50,000 in cash

Solution

  • Set up their own Self Managed Super Fund
  • Contribute $50,000 cash into the fund
  • Roll over their retail fund of $250,000 in their Self Managed Super Fund
  • They set aside $7,500 for contributions tax payable
  • They can borrow up to 70% of the value of the property i.e. $315,000
  • The balance of the property $135,000 is paid for from the $292,500 currently in the account. The balance of $157,500 can be used to pay for set up costs, stamp duty and a substantial share and/or managed fund portfolio.

Outcome

  • Mavis continues to pay market rent for her shop, while still saving for her retirement with Max
  • All rent received and capital growth is taxed concessionally in the Self Managed Super Fund
  • No need to worry about her tenancy of the shop or a landlord
  • The rent alone covers the principal and interest payments with money to spare. Therefore, along with income from other investments, they have sufficient cash flow in their fund to ensure their investments grow