A guide to SMSF commercial property

Investing in commercial real estate is a popular way to use your SMSF. It provides great profit potential while giving members more flexibility compared to stocks, bonds, and residential property investments.

If you’re interested in buying a commercial property via your SMSF but don’t know where to start, this guide is for you. Read on to learn about SMSF commercial property investments and how to make the most out of this endeavour:

How to buy a commercial property through your SMSF

Buying a commercial property through your SMSF is more complicated than buying one yourself. You need to abide by strict guidelines for a successful property purchase. Make sure you follow these steps when you buy an SMSF commercial property:

Before buying an SMSF commercial property, you must...

• Make sure it aligns with your SMSF investment strategy. Go over your investment strategy and trust deed with your SMSF advisor to ensure it includes this type of investment. Update the asset diversification, liquidity, and maximisation of returns as needed.
• Figure out a budget. Check your SMSF balance to figure out whether buying outright or buying through an SMSF loan is right for the investment. You’d need the full purchase price, stamp duty, legal fees, and other hidden costs to buy a property outright.
• Find a good SMSF loan. If you don’t have sufficient funds, you can always buy a commercial property with an SMSF loan. This also allows you to extend your price range to get the best investment possible. As long as your SMSF balance can cover the deposit, you can use an SMSF loan to purchase a commercial property.
• Set up a bare trust within the SMSF. This step is for those who will use an SMSF loan. A bare trust separates your commercial property investment from the rest of your SMSF investments. This is best handled by SMSF professionals.

When you borrow money for your SMSF to buy a property, it should fall under a limited recourse borrowing arrangement (LRBA). This means that if you default on your SMSF loan, the lender can’t come after other assets in the SMSF.

During your SMSF commercial property purchase, you need to...

• Make sure it’s a business real property. The commercial property you choose must meet the Australian Taxation Office’s (ATO) business real property guidelines. These properties are land and buildings used exclusively and wholly in a business. It must satisfy the business use test to be considered a real property. Examples of business real property include offices, warehouses, shops, farms, or commercial or industrial property.
• Look at the property asset rules. If you’re buying a commercial property that has multiple titles, you need a separate bare trust for each one. A restriction when using an LRBA is that the asset purchase must be a single acquirable asset.
• Create and review the contract of sale. Go over the sale contract with an SMSF lawyer or other SMSF professionals to ensure that everything is in line with ATO regulations. Make sure that the trustee of the bare trust is the registered owner at settlement.
• Sign a commercial lease. A registered commercial lease shows the ATO that an arm’s length relationship exists between the company and the property owner. Remember, the lease charged on an SMSF commercial property should be fair market rates.

After buying your SMSF commercial property, you have to...

• Transfer the title. The title of your commercial property can only be transferred to the superannuation fund when the SMSF loan has been paid in full. Ensure that the LRBA and bare trust were set up properly, so you don’t have any issues during the transfer of titles.

What are your SMSF commercial property purchasing options?

There are different ways to buy a commercial property with your SMSF. Talk to your SMSF adviser or accountant about the following options to determine which is the best for your investment.

Direct cash purchase

This is the simplest way to buy a commercial property using your SMSF. Essentially, you’ll purchase the property investment outright using funds from your superannuation. The costs of the purchase include the property purchase price and stamp duty.

With this option, there’s no need to set up additional trusts or the like. The downside of this purchasing option is it restricts SMSF members to only what’s in their funds. If their super fund has a small balance, the type of properties they could buy are limited.

SMSF loan or purchasing through an LRBA

The great thing about this option is that you don’t need to have a large SMSF balance. You need to find a lender with a good SMSF loan. Ideally, one with low rates and favourable loan features. If your SMSF balance can cover the deposit on the loan, then it’s possible to use SMSF finance to buy a commercial property investment.

However, this is not as straightforward as a direct cash purchase. This involves setting up a bare trust in your SMSF by going through a LRBA with the lender. For more information about SMSF loans, get in touch with our friendly lending specialists at loans.com.au.

Purchased through a non-geared and geared unit trust

The SMSF buys the commercial property indirectly through a unit trust. This option is a bit more complex in terms of procedures. You’ll have to set up a unit trust that’s separate from your SMSF. Your SMSF then buys the units in the trust. This involves transferring money from the fund to the trust. The unit trust will buy the commercial property directly without borrowing money.

Buying a commercial property via a non-geared unit trust provides more flexibility when transferring ownership.

Purchasing a property investment through a geared unit trust follows a similar process. The difference lies in the ability to borrow money to purchase the property. If you borrow money, the SMSF member can’t own over 50% of the units in the trust.

Purchased through an in-specie transfer

An in-specie transfer pertains to transferring a non-cash asset, in this case a commercial property, to your SMSF. If you own a commercial property through your business, you could have the SMSF buy the property. There are restrictions and rules with an in-specie transfer so it’s best to consult an SMSF professional before anything else.

Pros & cons of SMSF commercial property investments

Using your SMSF to invest in commercial property offers plenty of advantages and disadvantages. It’s essential to weigh both carefully to know if it’s the right investment choice for you.

Advantages of an SMSF commercial property investment

• Take advantage of tax incentives. In the right circumstances, you can enjoy tax benefits like capital gains exemption, lower tax rates, tax deductions for loan repayments, and the like.
• Use the SMSF commercial property for your business. By using it for your business, you’re paying to rent to yourself. You don’t have to worry about landlords charging above market price for rent.
• The SMSF property is separate from other assets. Because the commercial property is under your SMSF, any issues with your business will not affect the property.

Disadvantages of an SMSF commercial property investment

• A complicated process. Owning and managing an SMSF commercial property and leasing it requires help from SMSF professionals. You must follow strict ATO guidelines and ensure compliance every step of the way.
• An expensive investment endeavour. For some superannuation funds with smaller balances, the cost of buying a commercial property could be too much.

Ready to invest in an SMSF commercial property?

Check out our range of low rate SMSF commercial loans at loans.com.au. Talk to our friendly lending specialists to learn more about your finance options. Call 13 10 90 or schedule an appointment today. You can also apply online!

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