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Buying your business premises via an SMSF

Buying your business premises via an SMSF

Jim Garis is the director of boutique business advisory and wealth creation firm The Garis Group. A chartered accountant with more than forty years’ experience in the profession, he believes accountancy is about far more than simple tax and BAS preparation: it’s about helping businesses build value. Jim also specialises in property investment and shares his insights with Resilium about how to buy your business premises via a self-managed super fund (SMSF).

What are the reasons why business owners should consider purchasing their business premises using their SMSF?

The taxing structure of an SMSF is much lower than the individual or corporate rate. While the fund is in accumulation phase (pre-retirement), the maximum rate of tax on income is 15 per cent and capital gains tax (CGT) is 10 per cent. In pension phase (post-retirement), the tax rate on income and CGT is 0 per cent.

Asset protection is an important element to take into account when considering purchasing a business premises using a SMSF. Using a SMSF structure separates individual and business assets from the assets held within a SMSF. This provides a protective shield from the ‘risks’ associated with running a business, such as customers, suppliers and creditors and employees.

Purchasing your business premises through a SMSF can also help you avoid the tenant and landlord issues that are often associated with commercial properties. Knowing that there will be continuity of tenure can provide peace of mind for your business.

When is the right time to purchase your business premises?

Purchasing a property in a SMSF is not for everyone and care needs to be exercised when considering this option. Business owners must first consider whether their SMSF has sufficient funds to allow for this acquisition. In addition, business owners also need to be conversant with the compliance requirements associated with the establishment of the fund and the ongoing administration. I would always recommend that any business owner wishing to establish and invest via a SMSF seek professional advice.

What are the key first steps?

The first thing that any business owner would need to do before considering purchasing a business premises with SMSF funds is seek professional advice regarding the appropriateness of the proposed acquisition within the fund. Such advice is normally delivered by way of a Statement of Advice (SOA) from a financial planner and/or a superannuation adviser.

Once a SOA has been prepared, a purchaser would need to consider if the acquisition will be made by way of cash or borrowed funds using a Limited Recourse Borrowing Arrangement (LRBA). If a LRBA is required, then the next step is to seek loan approval from a finance institution. In this regard, it is essential that an experienced SMSF lender is consulted to ensure it’s a smooth process. Lastly, the SMSF structure is complicated and must be correctly established to ensure compliance with the SIS Act. Using a SMSF specialist adviser will ensure that the correct and compliant structure is established.

What are some things to look out for?

There are a number of unique features when acquiring your business premises via your SMSF.

Firstly, you can purchase business real property (According to the Australian Taxation Office business real property is land and buildings that is used wholly and exclusively in a business) from fund members (this is not allowed with residential property). Fund members can also use the property to operate their business (members are forbidden from using residential property held in the name of the SMSF). However, any lease that is put in place must be at market rent and in line with the terms and conditions of a typical commercial lease.

Secondly, if you are considering transferring or selling business real property to a SMSF that is currently held in your own name, you must consider any CGT implications, as well as stamp duty. You should seek professional advice regarding any strategies that may be available to minimise your exposure to tax.

You will need to ensure that the investment in commercial property satisfies the 'sole purpose' test (the investment must provide a benefit solely for the SMSF member’s retirement). Care needs to be exercised when considering undertaking a major improvement on a commercial property that has been purchased. The SMSF may not retain its compliant status should a major improvement be undertaken that changes the character of the building.

Lastly, the investment in business real property should be in line with the SMSF investment strategy. Diversification is an important element in any investment strategy. Depending on the size of your SMSF, purchasing a single commercial property could have a major impact on the diversification of the fund.

What was the best piece of advice that you received when starting in business?

Prepare a detailed business plan about the business venture, paying particular attention to the SWOT analysis. Careful analysis can highlight matters not normally considered when the adrenalin of starting in business overwhelms the objective process. Also, I was encouraged to seek out a mentor who could provide me with valuable guidance on my journey.

For certain types of businesses, you may find tax advantages in putting your assets into a trust. Find out what the benefits and considerations are of setting up a trust for your business and whether you should look into it further.

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