Using an SMSF to invest in commercial property

Self-managed super funds (SMSFs) have become popular in Australia as it offers investors the ability to invest in commercial property. Buying an office, shop, factory or warehouse isn’t as straightforward as buying a residential investment property, so we have outlined below some of the pros and cons of buying commercial property through an SMSF.

When it comes to occupying a commercial property, the most common option for small business owners is a direct lease with a landland. However, with increasing rentals and low interest rates, owners are exploring other ways to secure a business location. If you are confident that investing in a commercial property is the best option for your business, a way to fund this is through an SMSF.

Although the law prevents you from buying a residential property through an SMSF and then living in it, you are permitted to rent a commercial premises owned by your SMSF to your business or a business you control.

Benefits of investing in a commercial property with a SMSF

Purchasing commercial property through an SMSF offers a number of benefits. It can be a powerful way for you to build your super and own an asset for retirement, whilst giving you the ability to purchase your business premises.

It also frees up capital for you by unlocking your super, thereby avoiding a large capital expense for your business in purchasing the property. Furthermore, assets within super benefit from a higher level of protection against insolvency, which can be particularly appealing if you may be subject to litigation due to the nature of your business.

You also stand to gain tax benefits. If you buy an investment property through an SMSF, the fund only pays 15% tax on rental income on the property. If the property is kept for longer than 12 months, the fund receives a discounted capital gains tax liability of 10%. Once trustees start receiving pension at retirement, any rental income or capital gains accumulated in the SMSF will be tax free.

There are, however, important considerations that need to be given when it comes to SMSFs, such as legal and compliance rules, tax and financial obligations, and various fees including costs to set up an SMSF as well as purchase property. Your finance broker can help you navigate through these requirements.

As the business owner, you must pay rent at market rates through a prearranged lease agreement—so no “mate’s rates”. In addition, equity is locked within the fund, so you can’t simply take your earnings out of it.

To find out if investing through an SMSF is a good investment strategy for your future plans, speak to a Mortgage Providers broker who is trained in SMSF lending and commercial property finance, and can give you the expert advice you need to grow your wealth.