With over 600,000 SMSF in Australia today, one of the most common questions we’re asked is ‘Can we buy a property to live in with our Superannuation funds?’. It would appear to be a great idea on face value, but unfortunately this is not allowed and there are some considerable consequences for breaching the governing laws of Superannuation.
In contrast with residential property, a SMSF can purchase a commercial property, then rent it to themselves or a relative conducting a business. This provides a major advantage for business owners as you can own a commercial property and pay rent to yourself, rather than a landlord. Let’s take a quick look at why commercial property could be the right investment strategy for you:
What is Commercial Property?
A commercial property is any property which a business operates within. Any business from small to large, from local cafe’s to large organisations can utilise commercial property. So why invest commercially? Most Australians feel more comfortable investing in property, rather than more complex investments such as shares and bonds. For this reason, it’s no wonder SMSF investments in ‘business real property’ have become an increasingly popular investment vehicle.
Rental payments can be paid to your SMSF or can be used as you please. You can also expect lower volatility from negotiated rental contracts when compared to other common investments such as shares, which can be more volatile.
Why should I include it in my SMSF porfolio?
While there are benefits to purchasing commercial property with your Self-Managed Super Fund, there are also some considerations to be aware of. For example, if you lease the property back to your own business, the lease must be at market rate – you cannot use this as a loophole for your business to pay more or less rent into your Superannuation.
Along the same vein, all payments must be on time and in full, just as if you were renting through an agency, and independent valuations must be conducted regularly. However, this is not necessarily a negative – as commercial properties generally have higher rental returns than residential, your rental repayments will allow your investment to grow more quickly! It is also important to note as with all SMSFs that any activity within the fund must be for the sole purpose of providing retirement benefits for the SMSFs members.
Some potential costs involved
In addition to the purchase price of the property, costs such as stamp duty, loan application fees, renovations, conveyancing and etc can impact the viability of the transaction. Ongoing costs such as building insurance, loan repayments and property maintenance can also catch you by surprise.
The Tax Benefits and Considerations
There are also tax benefits as while you are paying rent to yourself, the tax on rental income is only 15%. Capital gains are generally lower for commercial property than astute residential investments, but the capital gains tax is just 10% if the property is held for a year or longer. It should be noted, however, that your super fund must be a decent size; generally, between $400,000 – $600,000 to be considered for a loan.
How We Can Help
SMSFs can be great investment vehicles, but we strongly encourage you to speak with Endorphin Wealth to determine how best to approach purchasing commercial property with your SMSF. For an obligation free discussion, call us on 03 9190 8964, or email us at firstname.lastname@example.org