If you’ve been thinking about building or expanding your wealth, then opting for a self-managed super fund for commercial property could be the right move. This approach allows you to get more control over your retirement savings. An SMSF gives you direct access to decide where your funds are being invested, and this also includes the real estate sector. Commercial properties are becoming an attractive option among business owners for combining investment growth with business use. But before you choose an SMSF investment strategy, you need to understand its rules, benefits, and responsibilities.
Understanding SMSFs and Property Investment Rules
A self-managed super fund Australia allows trustees to manage retirement savings directly from the property. However, you must follow ATO (Australian Taxation Office) rules to ensure compliance with superannuation laws. Understanding these property investment rules will allow you to get commercial property through your SMSF without having any significant issues.
Here are the key rules you need to follow while buying property using SMSF:
- Sole Purpose Test: Every SMSF investment must be maintained for the sole purpose of providing retirement benefits to its members. It means that you cannot use them for short-term gains.
- Alignment of Investment Strategy: Each SMSF purchase must fulfil the document investment strategy, including risk, returns, diversification, and liquidity.
- Restrictions on Related Party Transactions: As an SMSF investor, you cannot buy assets from members or relatives, except when you meet certain conditions of superannuation laws.
- Residential Property Rules: If an SMSF owns residential properties, members cannot live in them or rent them.
- Commercial Property Flexibility: For commercial properties, SMSF members can rent them to related parties, as long as there is a proper lease and their offerings match the market rates.
To help you with going through all of these obligations, you can seek support from SMSF management services.
Benefits of Buying Commercial Property Through Your SMSF
Using an SMSF to purchase property has several advantages, which include tax relief, leaseback options, asset protection, and diversification. Here are some of them presented:
- Tax Efficiency: When you earn money from the commercial SMSF’s properties, the collected rent is taxed at a concessional superannuation rate of 15%. However, if the members have sold the property after holding it for more than 12 months, then the collected amount can be eligible for a one-third discount on capital gains.
- Leaseback Options: It allows you to lease the commercial SMSF property back to your own business by paying its rental income at market rates.
- Asset Protection: Properties invested through SMSFs are separated from individual ownership. These benefits protect your real estate assets from business risks.
- Diversifications: Property investments balance your portfolio to more volatile assets such as the share market.
- Retirement Growth: The rental income you earn is locked within the SMSF till your retirement. This discipline allows you to build substantial wealth with its long-term capital growth.
Eligibility Criteria and Compliance Requirements
In order to buy commercial property through the SMSF, trustees must meet Australian superannuation law and ATO requirements. Some of the key conditions include:
- Establishment Requirements: Your SMSFs must be accurately set up and registered with the ATO at the time of property purchase.
- Keeping a Clear Investment Strategy: As a trustee, you have to maintain investment documents to show how the property purchase aligns with the portfolio diversification, liquidity, and risk management.
- Regulatory Obligations: You must prepare annual financial statements and lodge an SMSF return along with details of your portfolio to stay compliant with regulatory bodies.
How the Process Works: Step-by-Step Guide
Purchasing commercial properties through an SMSF is different from a standard property purchase. All of these steps are governed by law under the Superannuation Industry (Supervision) Act 1993. To help you in following these steps, below is a detailed breakdown of the process of purchasing commercial properties through SMSF:
Step 1: Develop an Investment Strategy
Your SMSF must have a documented investment strategy that shows how the assets fit within the fund’s objectives. The clauses of the SIS Act mandate trustees to show diversification, risk, liquidity, and the ability to meet benefit payments.
Step 2: Seeking Professional Guidance
Property investments through SMSFs are risky investments in terms of compliance breaches. To avoid such issues, it is recommended to consult with an expert. For example, SMSF management services in Perth can help you to protect from breaching in-house asset rules or incorrectly establishing borrowing arrangements.
Step 3: Setting up Borrowing Arrangements
Availing SMSF loans can only be done under the Limited Recourse Borrowing Arrangement (LRBA). This arrangement protects your other investments by mandating that lenders can only access the specific asset purchased from borrowed funds.
Step 4: Conduct Due Diligence
Before making any SMSF purchase, all trustees are required to carry out proper due diligence. In this step, you have to review some legal checks, such as title searches, obligations related to SMSF property loans, zoning restrictions, and lease reviews.
Step 5: Finalising the Purchase
After the official documentation, the commercial property must be registered in the name of the SMSF trustee with the assistance of SMSF accountants. After that, all payments related to financial settlement must be paid from the SMSF’s bank account.
Using the Property in Your Business: Leaseback Strategy
The most attractive option when using SMSF to purchase property is the leaseback strategy. If you own a business, then you can lease the commercial property from the SMSF at the market rates. The amount you pay as rent is directly transferred to the fund’s income. This cycle helps you to collect retirement savings while your business gets a stable location to operate.
Financing Options: SMSF Loans (Limited Recourse Borrowing Arrangements)
As mentioned previously, borrowing funds for your SMSF is allowed in certain circumstances. One of these exceptions includes the Limited Recourse Borrowing Arrangements (LRBA).
An LRBA arrangement is applicable in the following scenarios:
- If the SMSF trustee borrows funds to purchase an acquirable asset, such as commercial properties.
- The asset is held in a separate trust from the SMSF, known as the holding trust.
Before you apply for the SMSF loan, it is recommended that you seek advice from SMSF advisers to help you in deciding the right step for you.
Ongoing Responsibilities and Costs
Owning property through an SMSF mandates you to fulfil multiple obligations. As an SMSF trustee, you have to manage ongoing obligations to maintain compliance with regulatory bodies. Some of them include:
- Annual Audit and Reporting: Each year, SMSF auditors examine the fund’s financial statements, including property transactions. This process verifies compliance with the SIS Act and makes sure that all assets are correctly reported to ATO.
- Getting Help from SMSF Accounting Services: In order to get assistance for annual audit and reporting, you can approach accounting services providers. These professionals help you to track your cash flow, rent collection, loan repayments, and other commercial property-related transactions.
- Analysing Property Management Cost: As a trustee, you are responsible for managing ongoing expenses such as insurance, council rates, maintenance, and repairs. Timely repairing the property preserves its value to get you the projected returns.
- Proper Loan Servicing: If your property is being purchased via LRBA, then all repayments must come from the SMFS’s own assets to keep transparency.
Common Mistakes to Avoid
Using SMSF to purchase property brings a rewarding retirement opportunity, but as a trustee, you should also be careful to avoid making any of these mistakes:
Using the Property for Personal Use: Occupying your SMSF commercial property is strictly prohibited, and breaching this rule can lead to penalties from the ATO.
Drafting Incorrect SMSF Loan Structuring: You must avoid poorly setting up LRBA, as this action may put the fund at risk of non-compliance or dispute from lenders.
Dismissing Professional Advice: Skipping professional advice often increases the chances of errors or penalties. So, always take a look at their perspective.
Not Keeping Records Updated: You should avoid calculating incorrect valuations, late reporting, or SMSF tax returns to be safe from the ATO scrutiny and audits.
Conclusion
Investing in commercial properties through SMFS is a powerful way to build long-term wealth. Through this investment, you can get benefits like tax efficiency, asset protection, and a leaseback option to run your business in this property. By following the rules and obligations of an SMSF, you can make an informed decision and get the complete benefit of such investments. Start today with SMSF property experts to ensure your investment begins by taking the right steps.
FAQs
1. Can My Business Lease the Property Owned by the SMSF?
Your business can lease the SMSF commercial property through a leaseback arrangement. However, the lease must be made based on the market rates and supported by formal agreements.
2. What are the Tax Benefits of Purchasing Commercial Property Through SMSF?
The profits you gain from SMSF property is taxed at a concessional rate of 15%, and capital gains can receive a one-third discount if you hold the property for more than one year. This step makes it a tax-effective way to grow your retirement savings.
3. How Can I Get a Loan to Buy Commercial Property through SMSF?
You can borrow funds through LRBA, which limits the lender’s claim to only the purchased asset. This accessibility protects your other investments from the financial risk of commercial property purchased through the SMSF.
4. What are the Responsibilities of Owning Commercial Property through SMSF?
As a trustee, you should manage costs related to maintenance, insurance, and loan repayments. At the same time, you should ensure that all financial activities are accurately reported.
5. Do I need Professional Help When Buying Commerical Property through SMSF?
Seeking SMSF advice is highly recommended to make sure that your investment complies with superannuation laws. These professionals help to avoid significant mistakes and maximise the benefits of your SMSF property purchase.