Medical and Dental practitioners often enquire about purchasing an owner-occupied commercial property through a Self-Managed Superannuation Fund (SMSF). We investigate the use of SMSF with the assistance of some SMSF experts.
Is an SMSF right for me?
There is not a one size fits all answer and depends on your specific financial requirements, funds available, borrowing costs, lending restrictions, personal and financial objectives in addition to your specific risk profile. Advice on whether an SMSF is appropriate for your circumstances can only be provided by a financial adviser or an accountant operating under an AFSL license.
Mathew Holden, Partner at Brentnalls SA advises:
“whilst the benefits of an owner-occupied commercial property being held in an SMSF are significant, what many fail to understand is that the burden of compliance shifts to the trustees and it is their sole responsibility and not that of their accountant or financial adviser to ensure the fund remains compliant. Failure to keep the fund compliant may result in significant penalties as SMSF’s are regulated by the ATO”.
What are the benefits of purchasing an owner-occupied commercial property through SMSF?
The benefits of an owner-occupied commercial property regardless of the structure it is purchased in include:
· Security of tenure and time at a particular location for your business
· No landlord restrictions on property use or fit-out/renovations
· Protection against price gauging with respect to rent
· Ultimately you are your best own tenant
· Investment exposure to a growth asset
Tax advantages of owning a property in an SMSF according to Matthew, “there are significant indirect tax benefits that result from owner occupied properties in an SMSF Structure, these include but are not limited to:
1. Paying down the mortgage in pre-tax dollars, allowing accelerated debt reduction
2. Contribution Caps Are Effectively By-Passed
Can my SMSF pay for my fit-out?
Rocky Singh, Director of Australian Business Tax explains “whilst this question may seem straight forward, it is one that many get horribly wrong, in the simplest of terms an SMSF may pay for the fit-out of a related party tenant. If an SMSF were to pay for a fit-out the amount of rent payable would need to be adjusted accordingly to account for the extra benefit gained by the tenant. Furthermore, the trustees must only pay for items that fall under the definition of business real property. The most appropriate way of determining this is to apply the follow test; if you were to sell the property, would the item be included as part of the sale of the freehold land? If the answer is no, then the item is not a fixture and therefore not business real property.”
Rocky also stresses "the ATO has stated that an improvement that results in the addition of fixtures to a property may be considered a contribution. A simple way to avoid this issue is by using a make good or retention of ownership clauses which would manage this issue."
Can I transfer an existing commercial property into an SMSF?
Matthew advises “The appropriateness of contributing or purchasing a commercial property from a related party is complex, if however, such a strategy is deemed to be appropriate there are a number of ways in which it can be effected. Tt is worth noting that applicable CGT and Stamp Duty costs may be triggered by such a transfer. It is imperative that advice is sought from an accountant, financial adviser and solicitor to determine if such a strategy is appropriate for your circumstances."
Who can assist in the purchase of an appropriate asset?
There are two types of agents in the market, selling agents and buying agents. Selling agents represent the vendor and are trying to achieve the best price and terms to suit the Vendor. A Buyers Agent is working for the buyer, doing the same in return for their clients. The advantages to engaging professionals to represent you in a purchase include
• Experience & Anonymity: A buyer’s agency is operating in the market daily. They know the best channels for sourcing the best property and securing it at the right price, whilst keeping your profile and profession confidential.
• Optimising Margins: Buyer agents buy hundreds of properties and with that experience they will set a strategic brief and work with your team of advisors (Accounting, Financial Adviser, Builder) to secure you the right property, in the right location for the best price.
• Research: Data from sub markets can be drawn on and presented in a simplified manner. This will ensure the property profile matches your strategic team plan.
• Leverage to negotiations. The right Buyers Agent will deliver a better outcome based on their extensive knowledge, lack of emotional connection and being able to keep a cool, calm head in negotiation.
There are so many factors that are to be considered when determining whether buying an owner-occupied property through a SMSF is appropriate. The most important thing is to ensure you surround yourself with a professional team that can provide you with a strategic framework specific to your circumstances and then assist you in executing your plan.