Business Premises in your SMSF - is it right for you?
Many business owners have found that owning their commercial property within their SMSF, when used appropriately, can be a powerful way to boost retirement savings by paying a market rate of rent to their SMSF rather than to an external party.
When the members do not have enough money in super to pay for the property outright, this can be achieved via a Limited Recourse Borrowing arrangement which allows the SMSF to borrow money towards the purchase of a property.
Purchasing the property in super rather than personally can help to pay off the loan quicker due to the concessionally taxed environment within super (a maximum of 15% tax compared to marginal rates of up to 47%), providing a larger portion of “after tax” income for loan repayments.
For those with larger balances within super, borrowing to fund the purchase price can provide them with the opportunity to diversify investments within the fund, rather than focusing on only one asset.
The meaning of “Limited Recourse” really is what it sounds – if the borrower were to default on the loan, the lender’s recourse in seeking repayment is limited to that property only and not the rest of the superannuation fund assets, or any other personal assets. For this reason the interest rate is generally higher than standard owner-occupier home loan rates.
Whilst some of the big banks have withdrawn from this LRB space over the last couple of years, there are still a few players remaining in the market. For those with the means to do so, an alternative option is for a related party loan to the SMSF.
This can be from the members personally or another entity which they control. This is a popular strategy and can be another way to “keep it in the family” by paying interest to a related party rather than the bank.
It is important to note that there are very clear ATO guidelines on this type of related-party loan, which include a number of requirements, such as: all transactions need to be at arms-length; must have a written loan agreement; must pay a market rate of interest (set at 5.94% for the current financial year); and a regular repayment schedule must be put in to place.
While there can be great benefits of purchasing a property within superannuation, particularly via borrowing, it can be quite a technical transaction and it is important to obtain the right advice before going ahead.