SMSF commercial property investments
Posted by Northadvisory on November 2, 2021
Did you know that the maximum number of members allowed in a self-managed super fund (SMSF) recently increased from four to six?
The Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 came into effect on 1 July 2021 and while it’s not expected that there will be a sudden increase in the number of SMSFs, it does provide new opportunities and more flexibility.
If you have more people in a self-managed fund it can mean more investment capital, and this could open the door to some uniquely tailored options.
One of these includes SMSF commercial property investment. Today, we take a look at this strategy and highlight some of the benefits… especially for business owners.
SMSF investment options
Most standard super funds – such as retail or industry funds, have specific investment strategies that they implement on your behalf… but with an SMSF you have the ability to select exactly what you invest in across a wide range of asset classes.
These asset classes include:
- shares – both Australian and international
- property – residential or commercial
- physical commodities – such as metals and minerals, agricultural or energy
- cash and fixed income products – such as term deposits or bonds
- collectables – such as artwork, antiques or jewellery.
When you invest in property through your SMSF there are some rules that must you must follow. The Government’s Moneysmart website states:
“You can only buy property through your SMSF if you comply with the rules.
The property must:
- meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- not be acquired from a related party of a member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
If your SMSF purchases a commercial premises, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.”
Investing in commercial property
Choosing to invest in a commercial premises presents an array of benefits… especially if your business becomes the tenant of the SMSF investment property. If you execute this correctly, it can help to reduce your business overheads and boost your long-term cash flow.
Knowing that your SMSF owns the property gives you confidence that your landlord won’t terminate your commercial lease or unfairly inflate rental prices above market value.
Plus, when your business pays rent… it will be paying the money directly to your SMSF, which can help your retirement fund grow.
While this sounds straightforward, it can be a complex process so it’s important that you engage a professional to guide you through the creation of your SMSF and through the purchase of your commercial property investment.
As with any property investment, there are tax implications you need to be aware of… but within the SMSF environment you can can considerably reduce these tax liabilities.
Firstly, the commercial rent your SMSF receives – the investment earnings – is subject to a 15% tax rate as opposed to your marginal tax rate if you held the property outside of super. The capital gains tax is also lower as it drops to just 10% if you hold the property for more than 12 months.
Plus, once the SMSF members enter their pension phase or they meet a condition of release, you can potentially sell the property without incurring any capital gains tax.
Seek professional advice
Purchasing commercial property through your SMSF can offer many benefits to your fund members but can be a daunting task. We always recommend seeking professional advice to make sure it is an appropriate superannuation strategy for your personal circumstances.