Investing in commercial property with your SMSF

Using your self-managed superannuation fund (SMSF) to invest in commercial property may seem attractive given the current low interest rates, volatile stock markets and low yields from residential properties. However, we recommend considering these pros and cons first.

With a good property and the right tenant, owning an office, factory or shop can provide a strong investment return within your superannuation portfolio. However, commercial property is an investment that must be carefully considered in line with your circumstances, risk appetite and overall asset allocation.

Owning your business premises

It is possible to own your business premises through your SMSF and lease it back to your business. This can be an effective way to grow your SMSF with the business paying rent for use of the premises to the SMSF, rather than to a third party landlord. This rent would continue to be a business deduction. However there are some strict requirements with this strategy, the key ones being:

  • The business must pay an arm’s-length rate of rent, so it can’t be too high or too low
  • There must be a written rent agreement between the business and the SMSF
  • The premises must be mainly used for business purposes
  • The business must continue to pay the rent on a consistent basis.

Potential risks

With commercial properties, specific risks include time it can take to find a tenant, or retaining a tenant in tough business conditions, and the time required to sell the property, particularly if funds are needed quickly.

Taxation benefits

There can be significant tax savings investing with an SMSF compared to holding the property in a company (taxed at 30%), investment trust, or personal name where you are taxed at your individual marginal rates.

For superannuation funds in accumulation phase, rental income is taxed at 15% while capital gains tax is 10% (provided the property is held for more than 12 months). In pension phase, no tax is paid on the rental income or any potential capital gain on the property (subject to the proposed new $1.6 million pension cap).

Other issues

  • Acquisition of property
    The trust deed and investment strategy of the superannuation fund must allow the trustees to purchase this asset type. If the business property is being purchased from a related party, you need to ensure that the property is purchased at market value.
  • GST compliance
    Dealing in commercial property often requires GST registration and ongoing compliance in addition to the usual SMSF ongoing compliance.
  • Borrowing to buy the property
    An SMSF may borrow under a limited recourse borrowing arrangement to purchase a property. The structure is complex and more costly to implement, so you should obtain professional assistance before considering this path to understand the short and long term financial implications, including the degree of gearing and whether it is appropriate for your circumstances.
  • Owning property jointly
    There are various options with using your SMSF to own propert jointly with related or unrelated parties. Like with direct acquisition, the superannuation rules are strict in relation to this structure, so professional advice is recommended to ensure compliance.

Is this investment type for you?

Self-managed super and property can be beneficial in the right circumstances and if it is setup correctly at the outset.

Accru has substantial experience with self-managed superannuation and can assist with strategies and compliance. If you would like more clarification about investing in a commercial property in a self-managed superannuation fund, contact your local Accru advisor.

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