Should I transfer my business premises to my SMSF?
What you need to know
One of the advantages of self-managed super funds (SMSFs) is the ability to acquire a business real property (BRP), such as a commercial property, a shop or even a farm through your SMSF. The property can then be leased back to a member to use in a business. This hand guide gives you the information you need to know about transferring ownership of a business premises to your SMSF.
What are the advantages of transferring a business premises to your SMSF?
- Potential for positive returns through rental income and capital gains on the property.
- Any rental income or realised capital gains will be taxed at the concessional superannuation tax rates.
- Allows a member to significantly increase their retirement savings by contributing their business premises to their SMSF, without needing to sell the property.
- Assets held within an SMSF are generally protected from creditors in the case of bankruptcy.
- Provides access to an alternative asset class that is consistent with the SMSF investment objectives.
Are there any disadvantages?
Capital gains tax may have to be paid when the property is transferred to the SMSF. Concessions do apply for small businesses that can reduce any capital gains tax due. Speak to your financial or tax adviser for more information.
What you need to know before you get started
There are a number of areas that should be considered before transferring business premises to an SMSF. The checklist below is a good starting point. However, we recommend you also speak with your financial and/or tax adviser.
Types of property that qualify as business real property (BRP):
BRP includes any freehold or leasehold interest in real property (i.e. Land and any buildings permanently attached to the land) where the property is used wholly and exclusively in one or more businesses.
Examples of BRP included:
- commercial premises – such as doctor’s surgery
- retail premises – such as a shop
- industrial premises – such as a factory
- land used in a primary production business – such as land used for grazing or cultivation
Investment strategy and trust deed
Establish whether purchasing the property is allowed the SMSF’s trust deed and that it’s appropriate for the fund given its investment objectives, risk profile and liquidity requirements. Trustees may need to engage a lawyer and a financial adviser to confirm this.
Borrowing to acquire the property
Under the limited recourse borrowing rules a trustee of an SMSF may be permitted to borrow to acquire an asset. However, these rules are complex and require specific structures and agreements to be put in place. It’s important to seek specialist financial advice before entering into any superannuation borrowing arrangements.
Arm’s length valuation
An SMSF is only permitted to purchase a business property from a related party (such as a member of the SMSF) for its market value. Trustees may need to obtain an independent professional valuation prior to transferring a business property to their fund to remove any uncertainty about the validity of the property value. Where a business property is then leased back to a member or other related party of the SMSF, the lease must be on an arm’s length basis.
Costs, duties and taxes
Transferring and holding a BRP in an SMSF may incur a number of costs, duties and taxes, including:
- Legal fees
- Stamp duty, goods and services tax and land tax; and
- Strata levies, council rates and property maintenance fees
- These costs should be considered before making a decision to hold BRP in your SMSF.
Asset can’t be used as security for a loan
The superannuation investment rules generally prohibit any asset of the SMSF being used as security for a loan. Once a property has been transferred into an SMSF it can’t be used as security for any loans taken out by a member or other related party.
In the event of a member’s death, the trustees may be required to sell SMSF assets in order to pay a death benefit to a member’s beneficiaries. In this situation, tax may apply to both the assets of the SMSF as well as the death benefit payment.
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