Why Business Owners Use an SMSF to Hold Commercial Property
Why Business Owners Use an SMSF to Hold Commercial Property
If your business pays rent every month for a warehouse, office, workshop or medical suite, you may have wondered whether there's a better way to structure things.
One option worth exploring is using a self-managed super fund (SMSF) to own the commercial property your business occupies.
Instead of paying rent to an unrelated landlord, your business could pay rent to your SMSF. The business still has premises to operate from, while the rent goes towards building your retirement savings.
It sounds appealing, but there are important rules, costs and risks to understand before getting started.
Let's look at how the arrangement works, why business owners consider it, and when it might not be the right choice.
What is an SMSF, and why does it appeal to business owners?
An SMSF is a superannuation fund that you manage yourself, rather than leaving investment decisions entirely to a large industry or retail super fund.
An SMSF can have up to six members. Members generally act as individual trustees or directors of a company that acts as trustee.
That means you have more control over investment decisions, but you also take on significant legal and compliance responsibilities.
For business owners, commercial property can provide a clear reason to consider an SMSF. You may already own or lease the premises your business needs, and you may want to build retirement wealth through an asset you understand.
However, an SMSF isn't automatically better than a conventional super fund. Establishment costs, annual accounting, independent audits and ongoing administration all need to be considered.
The key question is whether the benefits of owning the property through super outweigh the costs and risks for your particular circumstances.
Can an SMSF buy the premises your business uses?
Yes, provided the property and transaction meet the relevant superannuation rules.
The important concept is business real property. Broadly, this means land and buildings used wholly and exclusively in one or more businesses, subject to the detailed legal requirements.
Examples may include:
A warehouse used by a wholesale business.
A factory or workshop.
A commercial office or medical suite.
A retail shop used by a trading business.
Certain commercial farming properties.
Residential property generally doesn't qualify simply because you run a business from home. Mixed-use properties can also be complicated, so the precise circumstances need to be checked.
The business real property rules are significant because they create an exception to the general restrictions on SMSFs acquiring assets from related parties.
In suitable circumstances, an SMSF can purchase qualifying commercial premises from a member or a related business and lease them to that business.
The purchase must be properly structured and supported by appropriate market-value evidence. Capital gains tax, stamp duty and other transaction costs may also apply, so the numbers should be modelled before proceeding.
How does the rent-back arrangement work?
Imagine your company operates from a commercial warehouse. The company currently pays rent to an external property owner.
Under a properly established SMSF arrangement, the fund purchases the warehouse and leases it to your company.
The company continues paying rent as a business expense, while the SMSF receives rental income as an investment return.
That rent can help fund the SMSF's ongoing expenses and contribute to members' retirement savings.
There is an important condition, though: the arrangement must operate on genuine commercial terms.
You cannot simply decide to charge a lower rent because you own both the business and the fund. The lease should be documented, rent should reflect market conditions and payments should be made in accordance with the agreement.
An independent rental assessment can help support the amount charged. Rent reviews, arrears and lease variations should also be managed properly.
If the business experiences cash-flow difficulties, the fund cannot simply ignore unpaid rent because the same people control both entities. That can create compliance problems and may have serious tax consequences.
What are the potential tax advantages?
Tax is often a major reason business owners investigate this structure.
During the accumulation phase, an SMSF's taxable income is generally taxed at a concessional rate of 15%, subject to the applicable rules. Certain capital gains may receive a one-third discount where the relevant conditions are satisfied.
If the fund holds the property while paying retirement-phase pensions, some income and capital gains may receive more favourable treatment, subject to the retirement-phase rules and applicable limits.
The business may also be entitled to a deduction for rent paid, provided the usual tax requirements are met.
However, these outcomes aren't guaranteed, and the tax treatment of the business and the fund must be considered together.
For example, the non-arm's-length income rules can produce an unfavourable tax outcome where an SMSF receives income under a non-commercial arrangement. Getting the rent wrong can therefore undermine the very tax advantages you're trying to achieve.
It's also important to account for the tax and transaction costs involved in transferring an existing property into an SMSF.
A good starting point is to model the actual purchase price, rent, borrowing costs, tax position and intended holding period. Don't base the decision on the headline tax rate alone.
Our article on SMSF tax leakage and how it happens explains why getting the details right matters.
What if the SMSF doesn't have enough money to buy the property?
Some SMSFs have enough assets to purchase commercial premises outright. Others may consider borrowing.
SMSFs can use a limited recourse borrowing arrangement (LRBA) to acquire certain assets, including eligible commercial property, if the arrangement satisfies the relevant requirements.
Under an LRBA, the acquired asset is generally held in a separate holding trust, and the lender's rights are limited in accordance with the borrowing arrangement.
These loans can be more expensive and harder to obtain than ordinary property finance. Lenders may require a substantial deposit and assess the fund's capacity to service the debt carefully.
You also need to consider what happens if rent falls, interest rates rise or the business can no longer afford its lease payments.
Superannuation contribution caps mean you cannot necessarily put extra money into the fund whenever cash gets tight.
Our guide to concessional and non-concessional SMSF contributions explains the main contribution categories and why planning matters.
What are the main risks?
The potential benefits are worth considering, but commercial property inside an SMSF isn't risk-free.
Your retirement savings may depend on your business
If your SMSF's largest asset is the building leased to your own business, your retirement savings and business income may be exposed to the same economic pressures.
If the business struggles, rent may stop. At the same time, finding another tenant or selling a specialised property could take months.
The fund may then have difficulty meeting expenses, paying benefits or satisfying pension requirements.
Property isn't easy to sell in pieces
Unlike listed shares, commercial property is relatively illiquid. You can't sell a small portion of a warehouse to raise cash for an unexpected expense.
Your investment strategy needs to address liquidity, diversification, insurance considerations and the fund's expected liabilities.
Compliance failures can be expensive
SMSF trustees must keep records, prepare financial statements, arrange an independent audit and lodge the annual return.
Trustee penalties can apply to breaches of the rules, and some penalties must be paid personally rather than from fund assets. Using an accountant helps with administration, but it doesn't remove your legal responsibilities.
Our guide to SMSF annual return deadlines and penalties explains why keeping up with lodgments is important.
You may lose valuable insurance
Moving money out of an existing super fund can affect insurance cover, including life and total and permanent disability insurance.
Before transferring your balance, check what cover you currently have and whether suitable replacement insurance is available and affordable.
Is an SMSF cheaper than a regular super fund?
It depends on the fund's balance, investments and administration requirements.
An SMSF generally has fixed-dollar costs, including accounting, financial statements, an independent audit, the ATO supervisory levy and any relevant company, valuation or investment-platform fees.
A large super fund may charge percentage-based fees or a combination of fixed and percentage-based fees.
For an SMSF with a relatively small balance, fixed costs can consume a significant proportion of the fund's assets. With a larger balance, the percentage impact may be lower, although the absolute costs still matter.
Adding family members may spread some costs across a larger pool of assets, but it also increases the governance responsibilities and complexity.
You can read more about whether an SMSF makes sense with a substantial super balance and whether adding family members can reduce costs.
Who is this strategy best suited to?
An SMSF holding commercial property may be worth investigating if:
Your business has a genuine, long-term need for the premises.
The fund has sufficient assets or a viable, compliant funding arrangement.
You can afford the establishment and ongoing compliance costs.
You understand that the property may be a concentrated and illiquid investment.
You're willing to take your trustee responsibilities seriously.
It may be less suitable if your business is unstable, you expect to relocate soon, the fund would hold virtually all its assets in one property without a suitable risk-management strategy, or you don't want to be involved in ongoing administration.
You should also plan for the eventual sale of the business, retirement, death or a change in family circumstances. The right arrangement needs to work at the exit as well as at the beginning.
Frequently asked questions
Can an SMSF buy the premises from me personally?
It may be able to if the property meets the business real property requirements and the transaction complies with the relevant rules. Independent valuation, tax and stamp duty consequences should be considered before proceeding.
Can my SMSF buy my family home?
Generally, an SMSF cannot acquire residential property from a related party under the business real property exception. A home doesn't qualify simply because a member runs a business from it.
Can the SMSF run my business?
An SMSF can hold eligible investment assets, including qualifying commercial premises leased to a related business. It generally cannot operate the trading business itself, because the fund must meet the superannuation law's retirement-benefit purpose requirements.
Before you make a decision
Using an SMSF to hold commercial property can align your business premises with your long-term retirement planning. But it isn't a shortcut to tax savings, and it won't suit every business owner.
Start by comparing your current rent, the property's market value, the fund's available balance, the likely ongoing costs and how long you expect to use the premises.
At Guidance Accounting, we help SMSF trustees understand their compliance obligations and manage their fund's reporting requirements.
If you're considering holding your business premises through an SMSF, contact Guidance Accounting to discuss the compliance requirements and the costs you should consider before proceeding.
Disclaimer
This article is provided for general information purposes only and does not constitute tax, financial, investment or legal advice. The suitability and tax treatment of an SMSF commercial property arrangement depend on the individual circumstances and the applicable law. Superannuation and taxation rules can change. Seek advice from appropriately qualified professionals before establishing an SMSF, transferring property or making investment decisions.