Business owners can run into difficulties when operating from leased premises, such as:
- Disputes with your landlord over rent increases, repairs, extensions; or
- A landlord can prevent you selling your business by refusing to agree to your proposed buyer.
An option for business owners to avoid these pitfalls is to purchase their premises through their Self Managed Super Fund.
When Can An SMSF Purchase Business Premises
There are two circumstances in which you might want to use an SMSF to purchase business premises.
- You do not currently own premises
Provided that the purchase of commercial property makes sense for the fund, there is nothing preventing your SMSF from purchasing a property for your business.
You should note however, that there are limits on the capacity of an SMSF to borrow funds to purchase property (in the event your fund does not have sufficient capital).
- You currently own the premises from which you run your business
If you already own your business premises, you won’t have the problem of your landlord cramping your style. However it can still be financially beneficial for you to consider transferring or selling the premises to your SMSF, particularly given:
- The rent generated will be subject to a low maximum tax threshold; and
- The payments made by your SMSF to you are also subject to low taxation.
If you currently own the premises from which your business is run, you can either:
- Transfer the asset as an in specie contribution, however in doing so you must be aware of any contribution limits; or
- Sell the premises to your SMSF. This sale must be at arms length, not conflict with the sole purpose test (of providing benefits to fund members) and comply with the investment strategy formulated by the SMSF.
What Sort of Premises
In all circumstances the premises must be “business real property”. This is because the SMSF will need to enter into a lease arrangement with your trading entity, which is a related party.
To be “business real property”, two basic conditions must be satisfied:
- The ownership must be an eligible interest in real property, being a freehold or leasehold interest in real property or any other interest in Crown land that can be assigned or transferred; and
- The property must be used “wholly and exclusively in one or more businesses”. This business use test will be easily satisfied where the business itself is the only user of the land. Most people run into difficulties if they live at the premises from which they run their business.
- The SMSF can lease the property to your business, provided this lease is on commercial terms. Importantly, this rental income is taxed at a lower rate (maximum 15%).
- Any potential capital gains tax on the future sale of the property will be minimised (maximum 15%).
- You will avoid disputes with your landlord, and you will not be vulnerable to the possibility of a landlord not renewing your lease.
- In the event of financial difficulty, creditors may find it more difficult to access an SMSF’s assets than the assets of your business.
- You do not tie up your business capital in the property.
Things To Be Aware Of
- An SMSF cannot directly borrow to finance its purchase of business premises. However, there are mechanisms for SMSFs to borrow money in certain instances, often through a limited recourse borrowing arrangement.
- Stamp duty will likely be payable on the transaction.
- There are caps on the contributions that can be made to a SMSF, and you must be careful when transferring property that its value does not breach these caps.
- The relationship between your business and your SMSF must be at arms length. Therefore, you should have a formal lease document in place and pay market value rent.
- Purchasing business premises may limit the diversity of your SMSF, and expose it to vulnerability, for example if the property market plummets.
- You should consider if, or, how your business is likely to grow and if so whether the premises will remain viable.
If you would like to purchase your business premises through your SMSF contact our Commercial Property Team for advice and assistance.