Check to see if any of the following restrictions apply.
Self-managed super funds (SMSFs) have a powerful story to tell to anyone wanting to invest in commercial, retail and industrial property:
You get tax concessions when you make super contributions; tax concessions on investment earnings; the fund can invest in business premises, if that’s what you want to do; capital gains are only taxed at 10 per cent; and, if you structure the sale transaction right, you might pay no CGT (capital gains tax) when you sell the asset, when paying a pension from your fund.
These facts make SMSFs very attractive for anyone running their own business, especially when they want the super fund to own the premises where they, or their relatives, run the business.
The “in-house assets” test restricts how the trustees, members, their relatives and other entities they control (such as trusts, companies or partnerships) can use the money in a super fund for their own purposes.
In general terms, only 5 per cent of the market value of a super fund’s assets can be used by these people.
However, this 5 per cent restriction doesn’t apply to an SMSF that owns “business real property” that is leased to anyone – including the trustees, members, their relatives and so on.
Is your property eligible?
You might be able to sell your property into the SMSF if it can be defined as business real property. It needs to be a freehold or leasehold interest in real property, that is, land and buildings, and any interest in Crown land (other than leasehold interest), which is capable of assignment or transfer.
The property needs to be used wholly or exclusively in one or more businesses.
The definition of business real property can be complex. In 2009, the Australian Taxation Office (ATO) released a 70-page ruling – SMSFR 2009/1
– on this topic, which contains 37 useful examples.
If business real property is being acquired by the SMSF from a related party, then all the rules relating to related party transactions apply.
Business real property often doesn’t include property used partly for running a business and partly for residential purposes.
For example, suppose an SMSF owns a retail shop and above the shop is a small flat that is zoned residential and rented out accordingly. It’s unlikely that an SMSF would be deemed to be running a residential property rental business so this particular property probably won’t satisfy the requirement to be used wholly and exclusively by one or more businesses.
As a result, such a property can’t be leased to the SMSF’s members, their relatives or companies, trusts or partnerships that any of these people control.
The above restriction doesn’t apply to farmers. An SMSF can own a farm and lease it to the member, i.e., the farmer, as long as no more than two hectares of the land contains a dwelling that is used for private or domestic purposes.
The predominant purpose of the entire rural property can’t be for private or domestic purposes.
Subject to all these restrictions, small businesses can use their SMSF monies to own their business premises.
This is a handy way for a business to gain access to cash or expand into larger premises.
For example, suppose a business owns its current offices, which are worth $250,000. The business owners also have an SMSF, which has $400,000 in it. The business needs bigger premises but it doesn’t have the cash to buy the new place outright or expand the existing premises, and doesn’t really have the cash flow to support any new borrowings for either of these options.
There are a couple of alternatives available.
The business owners could sell their current premises to someone else and have the super fund acquire newer, larger premises. In this way, the business would generate some additional funds.
Alternatively, the business owners could sell the business premises to the SMSF and use the remaining funds in the SMSF to expand the premises.
Any lease arrangement between a trustee and a related business must be done at arm’s length. The SMSF trustee must make sure the arrangement is documented in the same way that commercial property leases are done in the local area.
This would need to include the provisions for a market rent, for regular rental reviews, for late or no payment penalties and so on.
The trustee must be prepared to enforce its rights (including imposing penalties) in exactly the same way they would if an unrelated business was leasing the property.
The conflict of interest for an SMSF trustee in these circumstances is pretty obvious and it’s common for trustees to miss rental reviews and allow their related businesses too much slack when it comes to paying rent on time.
Both practices must be avoided at all costs.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.