Using super to buy commercial property presents a range of opportunities for SMSF members to grow their retirement savings. As property becomes an increasingly popular SMSF investment choice in Australia, here are all the tips to know, and traps to avoid when leasing a commercial property in your SMSF.
Tips on buying commercial property with super
Tip 1: Lease back to your business
Buying commercial property with super is not only an attractive investmentment option, but can actually be a smart business decision. SMSF trustees are not ordinarily permitted to live in, stay in, use or benefit from any assets owned by the SMSF – but commercial property is treated slightly differently. Providing the property is leased on an arms-length arrangement, a member-owned business is permitted to lease the commercial property from the superfund. This provides generous tax relief, in that the business can deduct the rent payments from its tax liability, and the income feeds into the SMSF. This helps to grow retirement savings and means the rental income is subject to a concessional tax rate of 15%.
Tip 2: Source quality tenants on longer term leases
If your SMSF-owned commercial property isn’t leasing the premises to a member-owned business, an ordinary tenancy arrangement must be established with an unrelated party. Commercial leases tend to be longer term, which can provide an element of income reliability that residential property investments may lack.
Traps of buying commercial property with super
Trap 1: Beware of commercial leasing laws
Commercial leases are treated differently to retail leases. Retail leases are governed by the Retail Leases Act in each state and territory in Australia, whereas standard commercial leases carry less regulation. It’s important that trustees exercise due diligence when sourcing and investing in property assets, to ensure the fund is capable of adhering to relevant laws. Unlike equities, property investments require more hands-on work to operate, and this must be considered before an asset is purchased.
Trap 2: Beware the arms-length arrangement
Another trap to avoid in SMSF commercial leasing is ensuring that an arms-length arrangement is upheld when leasing back to a member-owned business. A compliant agreement between a member’s business and the SMSF as the commercial landlord should include the following:
- An external SMSF property valuation and current rental appraisal
- The rent to be paid and the date upon which it is due each month
- An official lease term
- Specification on who is responsible for rates and other property-associated payments
- A rental review in line with inflation and market demand
Trap 3: SMSF commercial property insurance
Where an SMSF-owned property enters into a lease agreement with a related or unrelated party, associated insurances must either be in the name of the fund, or have the fund named as an interested party in cases where the leasing party is the policy holder.
For guidance and support SMSF commercial leasing or buying commercial property with super, contact SMSF Valuation Reports.
Information in this article is general in nature and does not represent true SMSF financial advice.