SMSF and Your Business

SMSF and Your Business

Episode 2 – SMSF and Business Real Property

Gemma Dale: Welcome to our new series, SMSF and your Business, where we explore ways for business owners to make the most of their retirement savings using self managed super. In this short video, we’re going to look at investing in property using your super, and even renting that property to your business.

I’m Gemma Dale, and I’m the Head of SMSF Solutions at nab. One of the unique attributes of self managed superannuation is the ability for the trustee to invest in direct property – that’s generally not possible if you’re in a public fund. In fact, direct property accounts for over 15% of all SMSF assets. Interestingly, despite the Australian love affair with investment properties, this isn’t about houses. SMSF investments in commercial properties (including factories, shops and farms) are actually more than three times the SMSF investment in housing.

So why might that be? I’m talking to Peter Hogan, one of Australia’s foremost experts in SMSF and nab’s Senior Manager, SMSF Advice.

Gemma Dale: Thanks for joining us. So Peter, why is it that SMSFs are so heavily invested in commercial property?

Peter Hogan: Well Gemma, there are a few reasons, but the major one is that superannuation law has a unique quirk that makes investing in commercial real estate very attractive, and that is that SMSFs are allowed to invest in real estate to use in their own businesses.

Gemma Dale: I can see that would be very attractive! Now most people know that you need to invest your super for your retirement, not for your personal use, so tell us more about how this strategy works.

Peter Hogan: Well, you’re right Gemma in that generally SMSFs are prevented from investing in anything other than investments held for retirement – that is, you can’t use your investments personally if you buy them in your SMSF. But there are a few exceptions to that, and a big one is what we call ‘business real property’. Business real property can not only be acquired by your SMSF, but it can then be leased to your business, and your SMSF can even buy a commercial property you currently own in your own name.

Gemma Dale: Okay, that’s big news. So firstly, tell us exactly what is meant by ‘business real property’.

Peter Hogan: Business real property generally means land and buildings used wholly and exclusively in a business. There is one additional quirk – if the property is used in a primary production business such as a farm, it can still meet the test of being used wholly and exclusively in a business, even if it contains a dwelling that is used for private or domestic purposes. The dwelling must be in an area of land no more than two hectares and the main use of the whole property can't be for domestic or private purposes.

Gemma Dale: So people owning investment properties shouldn’t be getting all excited at this point?

Peter Hogan: No, residential investment properties are very clearly not eligible for this exemption.

Gemma Dale: Okay, so we’re just talking about commercial property, like shops, offices and warehouses that are eligible for this exemption. So what does this exemption really mean?

Peter Hogan: If you are interested in holding business real property in your SMSF, what this means is that you can acquire these premises from a related party of the fund, and you can lease these premises to a related party of the fund – including a member.

Gemma Dale: Okay, so I run a small business, and I’m interested in buying the office space that I’m currently leasing, and I want to use my super to do that…

Peter Hogan: That’s a perfect example – with your SMSF, assuming it fits with your long term investment strategy, you can buy that office, and then lease it back to your business at commercial rates.

Gemma Dale: Right – so I can’t decide that I want to pay my SMSF $1 a month if the market rate is $1,000?

Peter Hogan: That’s right- the law requires that your SMSF does everything at ‘arm’s length’, so you’ve got to pay market rates. But this is your retirement investment, so you don’t want to deprive your super fund of that rent anyway. And, because the rent is paid as income to the super fund, it’s taxed at just 15%.

Gemma Dale: That makes sense. And if I already own the property (the office), but I like the idea of having my super invested in a commercial property, my super fund can actually buy it from me, or from my company?

Peter Hogan: Yes, it can. There are a few ways to do this – you could actually transfer the property in and treat it as a contribution (although you’ve got to watch the contribution caps if you do this). You can even claim a tax deduction for the contribution in some cases. Or your fund could buy it from you outright, by paying you cash – remembering of course, that it has to pay the market price.

Gemma Dale: So it’s becoming very clear why SMSFs hold so much commercial property. From what we’ve just discussed, it looks like there are quite a few things to watch out for – what are your top tips?

Peter Hogan: As you say Gemma, this is a really complex area, so we really recommend anyone thinking about this get advice from an SMSF specialist. If you own the property, you’ll need to consider capital gains tax, stamp duty and contributions, as well as making sure you pay what the tax office thinks is the right price, and if you want to lease it back to your own business, you’ll need to make sure that you’re paying the right amount of rent. And ultimately, it needs to be a good investment – your fund needs to have a documented investment strategy and this should be clear about why you wanted to own this particular property.

Gemma Dale: Okay, so a great strategy, but lots to think about and definitely worth getting the right advice.

Thanks for your time today, Peter

If you’re interested in this strategy or would like to know more about making the most of your SMSF, go to nab.com.au/smsf.