Could your business premises and the rent you pay to operate in them be used to better fund for your retirement?

Owning your business premises within your self managed super fund (SMSF) can make a lot of sense for your superannuation balance and your business.

For the SMSF it can provide a reliable ongoing source of income, and the potential future capital growth. For you as a business owner, it provides more stability than a third party landlord. Even if you have the means to purchase your business premises outside super, having the business premises within a SMSF may offer significant tax savings, especially when it comes time to sell.

Purchasing your business premises

There are rules that prohibit a SMSF from purchasing residential property from related parties, however ‘business real property' is exempt from this. The property however, must be used only exclusively for operating a business and the acquisition needs to be made on fair market value terms (usually requiring an independent valuation).

The key test of the acquisition is that the sole purpose of the transaction is to provide a retirement benefit for the members. This will involve ensuring that the purchase is in line with the investment philosophy of the SMSF, and is an appropriate investment for your overall portfolio and strategy.

Can the property be transferred for nil consideration?

If you already own your business premises, the premises can be transferred into a SMSF through an in-specie transfer (without cash). However, care needs to be taken with this approach as the transfer is counted towards the superannuation contribution cap limits. A member may make non-concessional personal contributions of $150,000 per annum each year (subject to the age and work status of the member). Members under the age of 65 may utilise the ‘bring-forward' rule and bring forward the following 2 years contributions to a maximum of $450,000. The penalties for violating contribution limits can be costly, and professional advice is required when considering these strategies.

If there are multiple eligible members within the SMSF, it is possible to combine these limits to complete the transfer. It is also possible to utilise a combined cash purchase & in-specie to transfer premises into the fund.

Can I use borrowed monies to purchase the premises?

Purchasing a property in a SMSF with borrowed money (commonly known as ‘gearing') is possible through the use of a limited recourse borrowing arrangement. These arrangements are however complex and require careful advice and documentation.

This type of arrangement requires the use of a trust which acts as the owner of the property in which the SMSF is invested. Generally, banks will require you to personally guarantee the loan for the purchase. This type of arrangement carries risks, as you will be personally responsible in the case of default, not the SMSF. If required to make a personal payment, this may be counted as against your contribution limits, potentially further increasing costs if limits are exceeded.

It is critical to seek expert tax and legal advice before considering this type of arrangement.

How much rent do I need to pay my fund?

The primary purpose of your SMSF for owning the business real property is to fund for the retirement of it's members - the income your fund will earn from this property investment is key to displaying this. To ensure that your fund remains complying, the business owner should enter into a legally enforceable lease agreement with the SMSF trustee. The rent payable in this contract should be on market value terms and the consequences of non-payment also outlined. This contract and the amount of rent payable should be regularly reviewed to ensure the rate remains at market value.

Taxation Benefits

There are potential taxation benefits from transferring your business premises into a SMSF. The income earned from the rental income by the SMSF (less outgoings) is taxed at a concessional rate of 15%. Once the members have commenced pension phase, the income is tax free.

When purchasing the business premises CGT may not be payable on the transfer between related parties if they pass the Small Business CGT Concessions test. In addition, upon disposal the proceeds of the sale are taxed at the SMSF concession rate of 10%. However, if the premises are sold after commencing a pension, the member's of the SMSF may not be subject to any CGT on the sale, making the sale of the premises upon the transition to retirement tax free.

There are numerous advantages to purchasing and holding your business premises within your SMSF. Taxation and concessional superannuation benefits, not the least knowing you are paying your business rent to help fund for your own retirement. The flexibility of a SMSF makes this type of investment possible, however, as with all investments there are risks and this investment should be carefully considered as part of an overall portfolio and investment strategy.

Chris Malkin
Principal - Superannuation Audit and Consulting

This information contained in this newsletter was compiled by WHK Pty Ltd ABN 84 006 466 351 (WHK) and WHK Financial Planning Pty Ltd ABN 51 060 092 631 (WHKFP). This is an information service only and is not financial advice. WHK and WHKFP do not provide any warranty regarding the accuracy and completeness of information in this newsletter. All material contained in this newsletter is based on opinions, conclusions and forecasts that are reasonably held at the time this newsletter was compiled. WHK and WHKFP assume no obligation to update the material to reflect any changes. WHK, WHKFP, their

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