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Considering Buying a Commercial Property for Your Business or Wanting to Transfer One to a Self-Managed Super Fund (SMSF)? The Pros and Cons of Owning a Commercial Building within a SMSF.

Written by Melissa Grimshaw

Congratulations, your business is reaching the size and profitability to consider buying your own commercial business premises!  Maybe you own your business premises already and you wish to simply transfer the property to a SMSF.

The first thing that should be considered when buying a commercial property, is the ownership of that building, and look ahead to the eventual sale of the business/building and potential tax consequences, amongst other considerations. 

There are two ways that can help you achieve a good outcome – owning the building within your personal name/ company/ family trust, may give rise to use the small business capital gains tax exemptions should you qualify.  Owning your building in a company and trust structure however, under the small business tax exemption rules can give rise to some further complications, though can be managed by a good accountant.

The second ownership structure that is considered is buying the property within a Self-Managed Super Fund. (SMSF), with a view that eventually, you may be able to reduce the any capital gains to nil, through superannuation pension phase.

In this article, we are going to look at the pros and cons of owning our commercial building in a Self-Managed Super Fund.

Pros

  • Your business can lease back from your Self-managed Super fund, ie your business rent goes to your SMSF, your business gets the tax deduction for paying rent, and the rent is taxed within the SMSF at the maximum rate of 15%.
  • A SMSF can purchase the property under current regulations.
      • This allows you to use existing cash within the SMSF to purchase the property, you receive the cash the SMSF receives the property.
      • If the SMSF does not have sufficient cash to purchase the property outright, you are able to utilize the borrowing rules available to a SMSF which involves trust structures. Generally, need a 30-40% deposit.
      • If the building is purchased through a unit trust with other parties through a unit trust, the SMSF can purchase units at different times , if can’t buy the property outright.
  • If already owned, a further consideration (assuming the property is debt free)
      • Can contribute partial or full value of the property into the SMSF using contributions caps – an in-specie transfer.
  • Once a condition of release is met, the SMSF moves to pension phase, the asset becomes tax free on earnings and tax free on future capital gains, should the building be sold. Alternatively, if sold while in the accumulation phase, the capital gains tax at minimum is 10% – maximum 15% depending on length of time owned.

Cons

  • Transferring a property that you already own by you, may trigger capital gains, but there are ways in which you may be able to manage this, including the use of small business capital gains tax exemptions for those operating out of the building.
  • Stamp duty may be payable, though some states do not charge this on this form of transfer).
  • Your business must pay commercial rates of rent to the Self-Managed Super fund to ensure that the arrangement remains compliant for the SMSF.
  • You have additional accounting and trustee responsibilities of owning and operating your own SMSF. A good SMSF administrator and accountant can help you with this.
  • Assets held in the SMSF cannot be accessed until members (yourself) meets a condition of release.  Generally, this may not occur until at least age 60 for some conditions of release to be met.
  • The SMSF may become overweight to direct property, which is highly illiquid. Need to ensure that the fund has sufficient  other liquid assets in case a member needs to roll their benefit out of the fund and  have a strong cashflow to meet ongoing expenses of the SMSF fund.
  • There are a range of caps that need to be considered, at pension phase and accumulation phase, that may be restrictive in the long term, depending on the size of fund and growth of your commercial building.
  • The business itself may run into operating failure and unable to pay rent and may cause a sale of the property at an inopportune time.
  • There are rules around what constitutes repairs and maintenance and capital expenditure when owned by a SMSF for your property. Repair and maintenance can be funded by borrowings through the trust structure, but capital works including major renovations would need to be funded by cash by the SMSF.
  • If there is a borrowing arrangement in place, you are not able to complete major renovations to the building as it constitutes a change in asset structure and would void the existing Loan arrangement.

Before you decide to purchase a commercial property, it is imperative to obtain advice from your accountant/financial adviser to ensure that the right ownership structure is selected based on your circumstances and visions for the future surrounding the building and needs of the business.  Considerations towards tax, set up costs, flexibility, rules for a SMSF operation and your plans for the commercial building all needs to be considered before a ownership structure is chosen.

 

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