Small business: Anthony O’Brien

There are advantages – and traps – in having your SMSF own your premises

Owning the premises where you run your small business may help boost your retirement savings if you have a self-managed super fund (SMSF). But you have to get on top of the rules.

Usually there are restrictions preventing SMSFs from investing in assets owned by related parties, such as fellow fund members or relatives. These restrictions don’t apply to “business real property”, which is generally an interest in land or buildings used exclusively by one or more businesses. If you’re a mechanic it might be the garage you work from, or if you’re a GP your surgical rooms. Whether it’s a shop, office or surgery, your SMSF can own this asset and lease it to your business.

“Business real property is an asset that is often owned inside a self-managed super fund by small businesses,” says Andrew Heaven, an AMP financial planner. “It can be legitimately leased back to your business on commercial terms and is the only asset exempt from the related party rules, in the context of running your own super fund.”

Tenant and landlord

Having more investment control is a major advantage of owning your commercial premises within an SMSF, according to Heaven. “For example, you’re vertically integrating your business model in that you rent your commercial premises from your SMSF at a market rate,” he says. “Likewise, you don’t run the risk of being unexpectedly removed as a tenant.”

There is another benefit to leasing premises from your SMSF. “The rent you pay is effectively boosting your retirement saving,” says Tim Howard, advice technical consultant at BT. “It’s a way of making additional contributions to superannuation outside the caps. The rent is also concessionally taxed at 15% when it goes in, which is much lower than the corporate tax rate of 27.5% for small business owners.”

The capital growth on a shop or office held within an SMSF is concessionally taxed when it is sold. “If you sell the property when you’re entirely in pension mode, then the capital gains tax rate will be zero,” says Heaven.

If your business develops credit issues or becomes bankrupt, premises held within your SMSF will generally be protected. “Because the asset is owned by your super fund, it generally won’t be affected by any issues with the business,” says Howard.

Is it right for you?

Before using your super to buy your place of business, weigh up how much you have in super. That said, it is possible for an SMSF to borrow money to buy a commercial property. However, the loan to value ratio (LVR) for SMSFs seeking to borrow for a commercial property is around 70%, says Tony Haworth, executive director at AAP Finance Brokers. The LVR can vary slightly based on the property’s location.

The business must be financially capable of paying the rent to the SMSF, as this is non-negotiable, adds Heaven. Cash flow for the fund is also critical where the fund has borrowed to buy the property. “Fund trustees had better make sure that they’ve got enough rent coming in, and/or employer contributions, or personal contributions within the $25,000 cap that would allow them to service any debt.”

Financial risks

A commercial property is a lumpy asset that might tie up a lot of your superannuation, and that’s an investment risk, warns Howard. You also need to think about what will happen when the time arrives to hang up the work boots. “When you decide to take an allocated pension, such as when you retire, there are cash flow issues that must be considered. If all your super is invested in a capital asset such as a commercial property, and you’re not getting the required rent from it, you need to think about how to fund your pension and loan repayments if some debt remains on the property,” says Howard.

There are succession planning issues, too. “You can’t keep the property within the super fund indefinitely. If your children take over the business, that asset will ultimately have to come out of the SMSF,” he says. Differing SMSF member ages, contrasting retirement plans of business owners and life expectancy can create additional layers of complexity that make the holding of a business premises within an SMSF problematic, notes Howard.

Avoid white elephants

Some experts believe that owning a business premise is a flawed retirement strategy, says AMP’s Heaven. “They argue how can a business owner know what square metreage rate or staffing needs will be required for the next 15 years? You might outgrow that space and then you are left with a white elephant.”

Yet for barristers, medical specialists and other professionals who don’t intend scaling up their businesses, owning their own premises through an SMSF is a worthwhile strategy. “It is a perfectly legitimate argument to say, ‘I’ll take my little 100 square metres and I’m quite happy to just stay within that space as part of my business plan,’ ” says Heaven.