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  • Writer's pictureReuben Bergola

Your Guide to Purchasing Commercial Property in an SMSF: Pros, Cons, and Tax Implications.



"Your Guide to Purchasing Commercial Property in an SMSF: Pros, Cons, and Tax Implications Explained by a Gold Coast SMSF Accountant"
"Your Guide to Purchasing Commercial Property in an SMSF: Pros, Cons, and Tax Implications Explained by a Gold Coast SMSF Accountant"

Are you a business owner looking to invest in commercial property? Did you know that you can purchase commercial property through a self managed superannuation fund (SMSF)? This could be a warehouse, office space, or a factory.


In this blog, we'll guide you through the process of setting up an SMSF and purchasing a commercial property for your business. We'll also discuss the pros and cons of owning commercial property in an SMSF and the potential Australian tax implications to consider.


Setting Up an SMSF

Before you can purchase a commercial property through an SMSF, you'll need to set up the fund. You can either set up the fund yourself or seek the assistance of a Gold Coast SMSF accountant. The process involves appointing trustees, preparing a trust deed, and registering the fund with the Australian Taxation Office (ATO). It's important to ensure that the fund is compliant with all relevant laws and regulations to avoid potential penalties. For detailed information on how to do this click here (Your Guide to Starting and Setting Up a Self-Managed Superannuation Fund (SMSF) in Australia).


Can you obtain a loan to purchase the commercial property in your SMSF?


When considering purchasing a commercial property through an SMSF, it's important to note that there are restrictions on borrowing to purchase property within an SMSF. These restrictions are known as the limited recourse borrowing arrangement (LRBA) and were put in place by the Australian government to protect SMSF members from overextending themselves with debt.


Under an LRBA, an SMSF can borrow money to purchase a single asset, such as a commercial property. However, the borrowing arrangement must be structured in a way that limits the lender's recourse to the asset being purchased. This means that if the SMSF defaults on the loan, the lender can only take possession of the asset, and not any other assets held within the SMSF.


Additionally, there are several requirements that must be met when setting up an LRBA. Firstly, the asset being purchased must be a single acquirable asset, meaning that it cannot be purchased as part of a larger property or development. The asset must also be held on trust until the loan is repaid in full.


There are also lending requirements that must be met by the SMSF when applying for an LRBA. The SMSF must have a trustee that is not a disqualified person and must be able to demonstrate that the loan can be repaid under the terms of the loan agreement. The loan must also be made on commercial terms, meaning that the interest rate and repayment schedule must be consistent with rates offered by commercial lenders.


The deposit required to obtain a loan for a commercial property purchase in an SMSF in Australia can vary depending on several factors, including the lender's requirements, the type of property being purchased, and the SMSF's financial position.


Generally, lenders will require a deposit of between 20% to 30% of the purchase price for a commercial property, although some lenders may require a higher deposit. Additionally, lenders may also require the SMSF to have a certain amount of funds in reserve to cover ongoing expenses such as loan repayments, property maintenance, and insurance.


It's important to note that the SMSF's financial position will also impact its ability to obtain a loan and the deposit required. Lenders will typically require the SMSF to demonstrate that it has sufficient income and assets to cover the loan repayments and ongoing expenses associated with the property.


Pros and Cons of Owning Commercial Property in an SMSF

There are several advantages to owning commercial property in an SMSF.

  • Firstly, rental income and capital gains earned by the property are taxed at a concessional rate of 15%, which can be significantly lower than your personal income tax rate.

  • Additionally, the property is owned by the SMSF, providing asset protection for the members.

  • The property can also be leased to the members' businesses, providing an additional income stream for the fund.

  • If a property is sold by an SMSF while it is in pension phase, any capital gains made on the sale are generally exempt from capital gains tax (CGT).

  • When an SMSF is in pension phase, it is not required to pay tax on the earnings it generates from assets that support the pension. This includes any capital gains made on the sale of assets, including property. However, if the property was acquired before 20 September 1985, it is not subject to CGT, regardless of whether the SMSF is in pension phase or accumulation phase.


However, there are also several risks associated with owning commercial property in an SMSF.

  • The property must be leased rented at a market rate to comply with superannuation laws.

  • There are also restrictions on making improvements or alterations to the property, and the property cannot be used for personal purposes, such as storage of personal items or as a holiday home.

Example of the tax benefit of a commercial property purchased in an SMSF:


Sure, let's assume the following scenario:


- A commercial property is generating a profit of $75,000 per year.

- The SMSF that owns the property is in pension phase and therefore not subject to tax on the rental income.

- The company that owns the property is subject to the standard corporate tax rate of 25% on the rental income.


Based on this scenario, here's how the tax savings compare between owning the property in an SMSF and owning the property through a company:


- If the property is owned by the SMSF, there are no tax obligations on the $75,000 rental income if the member is in pension phase. Therefore, the entire $75,000 profit can be used for the SMSF's investment or pension needs. If they are in accumulation phase, then the $75,000 would be taxed at 15% or $11,250


- If the same property is owned by a company, the company will pay 25% tax on the $75,000 rental income, which is equal to $18,750. This means that the net profit for the company is reduced to $56,250.


Therefore, by owning the property within an SMSF, there are significant tax savings as compared to owning the property through a company with a 25% tax rate in Australia. The SMSF can use the entire rental income to grow its investment portfolio or fund pension payments, whereas a company will have to pay tax on the rental income, which reduces the net profit available for reinvestment or distribution to shareholders.


It's important to note that this is just an example, and the actual tax savings may vary depending on the specific circumstances and tax rates that apply to the SMSF or company. Additionally, it's important to consider the compliance requirements and potential risks associated with owning a commercial property within an SMSF, and seek the advice of a qualified Gold Coast SMSF accountant or financial advisor before making any investment decisions.


What to Consider

When purchasing a commercial property through an SMSF, there are several other items to consider.

  • Firstly, the property must be purchased using the funds within the SMSF, meaning that you won't have access to the funds until you retire.

  • Additionally, there are restrictions on borrowing to purchase property within an SMSF, so you'll need to ensure that you have sufficient funds to make the purchase outright.

  • It's also important to consider the potential capital gains tax (CGT) implications when selling the property. If the property is held for longer than 12 months, the CGT rate is reduced to 10%. However, if the property is sold before this time, the CGT rate is 15%.


SMSF Setup Costs

The cost of setting up an SMSF can vary depending on whether you choose to set up the fund yourself or seek assistance from a Gold Coast SMSF accountant. There are also ongoing compliance costs associated with running an SMSF, including annual audits, tax returns, and legal fees. It's important to consider these costs when deciding whether to purchase a commercial property through an SMSF.


Conclusion

Purchasing a commercial property through an SMSF can be a great investment for business owners, providing a tax-effective way to earn rental income and capital gains. However, it's important to consider the risks and potential tax implications before making a decision. If you're considering purchasing a commercial property through an SMSF, seek the assistance of a Gold Coast SMSF accountant to ensure that the process is compliant with all relevant laws and regulations.


Disclaimer: The above blog is for informational purposes only and should not be taken as Australian financial advice. It is important to seek the guidance of a qualified Gold Coast SMSF accountant or financial advisor before making any investment decisions.


For more information or to setup a 30 Min Free Consult email info@new-wave.com.au or contact us on (07)55041999.

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