When investing in property with your SMSF, there are a variety of options to consider. However, it’s essential that the investment meets the sole purpose test in order to be compliant.
Furthermore, seeking professional advice before purchasing a commercial property through your SMSF is recommended. Doing so will guarantee that it abides by all necessary regulations and standards.
Investing in Commercial Property
Many SMSFs opt to purchase commercial property as part of their investment strategy. Buying property through a super fund has both benefits and drawbacks, so it is essential that you carefully weigh all the responsibilities, risks and costs associated with such an investment before making a final decision.
Superfund purchases or leasing properties for business use can be an efficient way to boost the value of your SMSF. Benefits such as higher rental returns and greater control over leasing agreements may reduce risk to your business or enable you to negotiate better terms with landlords.
To successfully manage your property investment, it’s essential to have a strategy in place for when your funds need to pay loan repayments, insurance premiums or other property costs. Additionally, this budget should include an unexpected cost contingency budget in case any unforeseen costs may arise during the course of ownership.
Lender Requirements
SMSFs are an excellent way to invest in commercial property, with data from the Australian Taxation Office (ATO) showing that $68 billion of limited recourse borrowing arrangements were held by Self Managed Super Fund Commercial Property Loans during March 2022 financial year. Before applying for a loan though, be sure you understand its lender requirements.
For instance, many SMSF loans require a higher minimum SMSF balance – the amount varying depending on the lender. Furthermore, some lenders require lower loan-to-value ratios for commercial property – meaning you’ll need more deposit than for residential mortgages.
An SMSF loan also comes with fees, similar to those associated with a standard home loan. These can add up to hundreds of dollars before you’ve even purchased your property.
Lender Fees
SMSF commercial property loans tend to have higher lender fees than standard residential loans, which could add hundreds or thousands to your monthly loan payment each month. These fees include application and valuation fees, SMSF review fee, establishment & settlement fee, ongoing & discharge fee as well as stamp duty.
Lenders require that your fund have enough cash flow to service the loan. This means ensuring the income from your fund (super contributions and rental income) is enough to cover any outstanding balance on the loan.
Investing in property through your SMSF can be a rewarding option, but it’s essential to comprehend the rules before making your move. The Australian Tax Office has strict guidelines regarding buying property through an SMSF.
Tax
Investing in commercial property through an SMSF offers several tax advantages. Any income and capital gains generated from assets purchased through the fund are exempt from federal income and capital gains taxes.
However, there are certain requirements that must be adhered to in order for the fund to comply with Australian superannuation law and stay out of the ATO’s crosshairs. When purchasing commercial property using your SMSF, several regulations must be met – including passing the’sole purpose test’.
SMSF trustees are only permitted to purchase commercial properties if they are not being occupied by a member or related party of the fund. If the property is being used as either a residence or receiving rental income from it, this must be clearly indicated in its trust deeds.
Limited Borrowing Recourse Arrangements (LRBAs) enable SMSF trustees to borrow funds for commercial property purchases without exposing the entire fund to risk. This gives lenders assurance that other assets in the fund will remain protected in case of loan default.
