Can an SMSF buy a commercial property?
Yes. This is the method of property purchase that is allowable for SMSF. As laid out by the ATO you can only buy property through your SMSF if you comply with the following rules.
The property:
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member unless commercial property.
- Must not be lived in by a fund member or any fund members’ related parties
- Must not be rented by a fund member or any fund members’ related parties.
- But your SMSF can purchase business property such as your own business’ premises. This is an attractive option for SMSF trustees as it allows you to pay rent directly to your SMSF at the market rate. Many SMSFs choose to do this to help them to grow their SMSF fund for their retirement, and instead of paying rent to a landlord/third party with no financial gain.
What funds should an SMSF have to purchase a commercial property?
It is advisable for a fund not to invest in one asset alone. So, there should be enough in a super to invest elsewhere, even when money has been used to buy the property. Or another option is to borrow to invest in property, but this in itself should not be seen as a cheap option. Loans that must be used when an SMSF borrows to buy property will generally have rates and required deposits at a higher amount than when borrowing at a personal level.
What are the rules around buying a commercial property from a related party?
The ATO has laid out very specific rules about buying property through your SMSF. When buying a commercial or business real property through an SMSF the rulings are different to residential.
‘Business real property’, such as commercial or industrial property, offices, warehouses, shops or even a farm, can be a legitimate SMSF investment. Residential property is also an allowable investment. However, with regards superannuation investments, the key difference is that, unlike residential property, a SMSF can buy business real property from related parties or fund members, and fund members or related parties (relatives of fund members) can use that SMSF asset if they choose to do so.
What fees are involved when my SMSF purchases commercial property?
As with any property purchase there are several fees involved and an SMSF should make sure they have the available funds to cover them. Examples of possible fees incurred when an SMSF buys a commercial property are:
- Upfront fees
- Legal fees
- Advice fees
- Stamp duty
- Ongoing property management fees
- Bank fees
All these fees will depend on the location of the SMSF and property, as well as who the SMSF works with to supply advice and legal services etc.
If borrowing to purchase the property there will also be loan fees and rates to consider.
Can an SMSF borrow to buy commercial property?
Yes – there is a very specific type of loan that is permissible for an SMSF purchasing a commercial property. It is called limited recourse borrowing or gearing. A SMSF cannot directly borrow to finance a property transaction.
Limited recourse borrowing can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
What is a limited recourse borrowing arrangement or LRBA?
An LRBA is when an SMSF trustee takes out a loan from a third party lender. The trustee then uses those funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust. Any investment returns earned from the asset go to the SMSF trustee.
There is no direct line between the lender and the borrower – except where the borrower makes repayments. If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF. More information can be found on the ATO website – here
What are the risks of borrowing/gearing my SMSF into property?
There are risks to be considered when borrowing to purchase commercial property with an SMSF.
- Higher costs – As previously mentioned, SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Cancellation issues – If your SMSF property loan documentation and contract is not set up correctly, there is a risk that your arrangement cannot be undone and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- No alterations – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
What tax has to be paid when an SMSF buys a commercial property?
There are several taxes that may be payable when purchasing the commercial property through your SMSF – stamp duty and capital gains tax are two examples.
Any capital gains tax payable on the transfer of the asset is a tax bill for the individuals who originally owned the asset rather than the SMSF, although, with tax advice, there may be opportunities to reduce or eliminate that personal tax bill.
If I want to buy commercial property for my business using my SMSF how does leasing work?
Regulated by the ATO, your business must pay a market rental rate for the property. To demonstrate to the ATO an “at arms length” relationship and minimise the risk of facing strict penalties, we recommend getting a registered lease to document legal compliance. Any lease in place must be at market rent and in line with the terms and conditions of a typical commercial lease.
Can I make improvements to the SMSF owned commercial property?
Not using borrowed funds – you must use your own SMSF funds. If you are set up in an LRBA then you cannot enter into any alterations on the property until the loan is repaid.
Can I transfer my own commercial investment property to my SMSF?
Because purchasing commercial business property from a fund member is not classified as a related party transaction it is permissible and can make good business sense.
However, as with all SMSF real property purchase, the transfer must be for market value and the fund’s rental income must also be at market price.
Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. This factsheet has been prepared by Superhelp Australia Pty Ltd without taking into account your personal objectives, financial situations or needs.
The information contained in the fact sheet may not be appropriate to your individual needs, therefore, you should seek personal financial advice before making any financial or investment decisions.
