The Critics

There has been criticism of this practice, mostly by the big insurers, banks, and super funds.  Two good reasons for this stand out; one, around a third of all super is in SMSF's and their owners are achieving better results at a lesser cost, and two, family businesses are withdrawing funds from these managers to invest in their own SMSF.

SMSF and Property

Most owners rollover their Super, start an SMSF, use the super as deposit on the property (usually one third of the purchase price) and borrow the balance.  The SMSF is the beneficial owner but while there is a mortgage the property must be held in the name of a property trust; the loan is a non-recourse one, the property is the lender's only security.

Positives

1  Exemptions for business property

Business real estate can be purchased from members (residential can not), and the SMSF can lease the property to related parties, like the members' business (not possible for residential property).

2. Concessional tax treatment

In the accumulation stage (pre-pension), net rents are taxed at 15% and capital gains at 10%.  The Fund can claim the same deductions as individual investors, including costs, depreciation, and interest.  Once pensions are being paid, fund income and capital gains are tax-free.

3. Asset protection and succession planning

There is greater security of tenure for the business, and the property can stay in the Fund through generations.  The property is usually beyond the reach of creditors too, whether creditors of the business or individual members.

4. Family businesses can be excellent tenants.

This includes paying the rent, looking after the building, even agreeing to rent increases.  Rents must be commercial, and can be a good way of getting more profits into the Fund.

Negatives

1. Portfolio is unbalanced

If the main or most significant asset is the property, there is insufficient spreading of investment risk.  However, there is no legal requirement for this, and it may be that trustees have sufficient diversification considering both super and non-super investments.

2. Conflicts from non-payment of rent

A Fund cannot provide financial assistance to members, which includes rent relief.  Trustees can be fined heavily for this, as the Fund's sole purpose must be to pay member benefits.

3. Gearing outside super may be more tax-effective

The Fund rate is 15%, lower than personal marginal rates, thus providing a lower tax benefit from gearing.  SMSF's can usually borrow around 65% so the Fund is not likely to be negatively geared for too many years.

4. Paying pensions

Member benefits and pensions may require other assets to be acquired by the SMSF, especially Cash; the Fund cannot borrow to pay member benefits.

5. Borrowing process and costs

The ATO has strict conditions on how funds borrow, requiring a bare/property trust to hold the property while there is a mortgage over it.  There are additional costs to set up the approved structure, for legals, and for the lenders in ensuring documentation meets their requirements.

Final thoughts

Putting your business premises into a SMSF is usually worthwhile - a plan for retirement, an alternative to low-earning investments with public funds, and a way to save tax and get more money into your fund.  But, check if it could be more tax advantageous outside super, make sure it is set up right, and ensure all dealings with the Fund are at arms-length.