Owning business premises in an SMSF can make a lot of sense for both SMSFs and business owners. It can provide a steady source of income and capital growth for the SMSF and also provides stability for the business owner as opposed to having an outside owner. At the same time, having your business premises in an SMSF instead of holding it personally or with a business can offer significant tax savings on disposition. Finally, SMSFs also offer one of the strongest structures to protect assets from creditors in the event of bankruptcy.

How can the SMSF legally buy commercial premises from business owners?

Unlike residential property, an SMSF can purchase ‘commercial real estate’ from related parties without breaching section 66 of the SIS Act. The property is required to be commercial real estate used exclusively in a business (for example, it cannot be a retail store with residential premises above). In addition, the acquisition must be at market value (ie valued independently).

The sole purpose of the transaction must be to provide a retirement benefit for members (ie, consistent with SMSF’s investment strategy). You should consult with your financial advisor if applicable to ensure it is a good fit for your portfolio.

Can ownership be transferred for no consideration?

Business premises can also be transferred to an SMSF without cash (in kind). The transfer is considered a contribution for SMSF members and is subject to maximum contribution limits. Non-concessional personal contributions of $150k per year is the limit on contributions each year (subject to member’s age and employment status). However, for those members under 65 years of age, non-concessional contributions of $50k can be made for those over 50 years of age, or $25k for those under 50 years of age.

Most SMSFs typically have two members (with a maximum of four members), and therefore business properties of most small businesses that are worth less than $1 million can generally be transferred without violating the contribution limits and incurring excess contribution taxes. Care should be taken when making contributions in the next two years if you activate the ‘advance’ provisions. A combination of cash/in-kind payments could also be made to transfer ownership.

What happens to leverage if SMSF does not have sufficient funds to buy outright?

Yes, this is possible, but it is vital that the transaction is completed correctly and properly documented.

The SMSF may purchase commercial real estate from a related party, provided any existing mortgage has been paid off first. Existing leverage must be extinguished before being transferred to the SMSF, and a new leverage arrangement may be established through a limited recourse loan agreement. It is essential that an independent appraisal is used to determine the purchase price.

Unlike an ordinary loan agreement, a limited recourse loan is established through a simple trust to legally equip the property in an SMSF. It is generally recommended that the level of indebtedness does not exceed 60% of the value of the property. The reason for this is that the investment will generally be cash flow positive and will not require additional financing from outside the SMSF. Failure to make payments on these agreements may trigger a personal guarantee payment required by your bank, and that payment would be considered a contribution by the member, which could result in excess contribution tax if contribution limits are exceeded. contribution.

The limited recourse loan agreement can be an ideal opportunity to give SMSF members the ability to purchase property that they might not otherwise have the resources to pay for. It is essential to seek expert tax and legal advice to benefit from these structures.

Commercial lease agreements

Once the property is within the SMSF, a legally enforceable lease must be drawn up between the SMSF trustee and the related party (sec. 71 SIS). We recommend that an attorney be hired to draft a fully documented commercial lease agreement between the trustees of SMSF and the company. The rent must be specified in the contract to be payable at company market value to the SMSF and also, for example, spell out the consequences of not paying the rent on time. The rent must also be adjusted regularly in future years to ensure that the rent paid is always at market value.

Capital gains tax

Capital gains tax may not be payable on the sale or transfer to the SMSF of existing property depending on whether the business premises are used in the related party’s business and whether the CGT Small Business Allowances pass. The capital gain may also be reduced in certain circumstances if the member makes a concessional contribution to the SMSF and claims a deduction to offset the gain.

Once SMSF members turn 55, they can also start a pension (transition to the retirement income stream) and may not be subject to capital gains tax on the subsequent sale of the property. This is a great benefit for business taxpayers who cannot access small business capital gains tax breaks. Because the income tax is not distributed between the years in which the property appreciates in value while in the accumulation phase and the years in the pension phase, once a pension has begun, the capital gains on sales of assets within the SMSF are tax-free.

If the SMSF disposes of the property before the pension phase begins, and the building has been held for more than 12 months, tax on any capital gains is still taxed favorably in the SMSF at just 10%.

Stamp duty

Stamp duty may also be payable in some states when ownership is transferred to the SMSF and depends on how the transaction is structured.

income tax

Rental income less expenses is taxed in the SMSF at 15 cents on the dollar. The rental expense in the business if you are a corporate taxpayer receives a 30% tax rebate, saving 15 cents for every dollar of tax paid by the family overall. This saving amounts to 30 cents on the dollar once the affiliates begin the pension stage.

Other issues

The property must also be valued at the SMSF each year on a reasonable basis. An annual independent appraisal is not required, and typically a curbside appraisal by a real estate agent is sufficient. If the SMSF is in pension mode, the SMSF’s property and assets must be valued at market value each year to continue to qualify for the generous tax concessions for SMSF in pension mode. To continue to qualify for these concessions, a market appraisal by a formal appraiser every three years would be best practice with curbside appraisals in between. The value should always be compared to the Council’s rate notice. If the SMSF is not valued at market value, the SMSF may not qualify for pension awards and all income will be taxed at 15%.

Holding the property in an SMSF also forms an excellent barrier for asset protection purposes, eliminating the property’s exposure to creditors and other inherent business risks. However, there are clawback provisions in the Bankruptcy Law for contributions made to defeat creditors.

SMSFs lead both industry and retail funds due to investments that only these funds can buy. Although trustees take on more responsibility, they will continue to be the preferred retirement structure in the future. Trustees should seek advice before making a final decision to pursue the strategy to ensure difficulties are identified and can be provisioned.