Borrowing in your SMSF

Borrowing in Your SMSF to Purchase a Commercial Property for Your Business to Lease

Legislation allows business owners to purchase a retail, commercial, or industrial property through their SMSF and rent that property back to their business. This opportunity is particularly advantageous for those who are currently renting an office, warehouse, retail storefront, or other business premises.  By leveraging their existing rental expense, they can purchase a commercial property and create a long-term investment.

Key Benefits of Buying a Commercial Property through Your SMSF

1. Rent Payments to Your Future Self: Instead of paying rent to a landlord, your business will pay rent to your SMSF.
2. Leveraging Your Superannuation Fund: Borrowing to purchase the property allows your SMSF to leverage its funds, potentially increasing the returns on your investment.
3. Tax Benefits on Investment Earnings: The rent earned from the commercial property is taxed at the concessional superannuation rate of 15%, which is typically lower than the marginal tax rate you would pay if the property were held outside of super.
4. Capital Gains Tax (CGT) Advantages: If the commercial property is held for more than 12 months, the CGT is reduced to 10%. If held for less than 12 months, the rate is 15%. Additionally, once fund members enter the ‘pension phase’ or meet a condition of release, the asset can be sold without incurring any CGT.

Restrictions and Misconceptions

It’s important to note that you cannot purchase a residential property through your SMSF and lease it back to yourself or your business to live in, even if you run your business from home. There is a common misconception that SMSF lending is no longer available or is prohibitively expensive. While most banks exited this lending market in 2018, many lenders continue to offer competitive SMSF lending options.

Current Lending Environment

With many lenders continuing to support SMSF lending, and the cost of superfund lending can now be comparable to many types of commercial lending offered by banks. This makes it an attractive option for those looking to purchase commercial property through their SMSF.

Other Considerations

• Loan-to-Value Ratios (LVR): LVR for both commercial and residential SMSF lending can be as high as 80%, allowing significant borrowing capacity.
• Limited Recourse Borrowing Arrangement (LRBA): The legislation requires that SMSFs borrow funds for commercial property assets under an LRBA. This arrangement protects other assets within the SMSF in the event of a loan default. As part of this arrangement, lenders typically require a personal guarantee as security.
• Bare Trust Ownership: The commercial property must be owned by a bare trust, a separate entity from the SMSF trustee. It is crucial to ensure that this structure is correctly established before the property purchase.
• Super Contributions to support lending: The income used to support SMSF lending is generally restricted to income within the fund and the members previous contributions.  To maximise the borrowing capacity, it is important to plan well in advance of requiring the loan so that the loan attainable is maximised.

Professional Guidance

By understanding and leveraging these benefits, business owners can effectively use their SMSF to invest in commercial property, creating a secure and tax-efficient pathway to grow their retirement savings while simultaneously supporting their business operations.

To navigate the complexities of SMSF property purchases and borrowing please speak with your Accountant who can also put you in contact with Hamilton Morello’s Finance Director, Jason O’Shaughnessy.