Setting up an SMSF comes with many benefits and some risks. As property is considered an illiquid investment, (hard to sell) holding life insurance can be a great way of managing this risk to your SMSF.
The decision many new SMSF members face, is whether to maintain the insurance that they hold within a retail, industry or employer default fund or if applying for new insurance via their SMSF is a better option.
You can invest as an individual or as an owner occupied SMSF investor to purchase a commercial CBD office suite, for medical practices, small businesses, legal practices or a farm or a warehouse style property.
It is advisable to seek specialist advice on these matters so that you don’t run into problems with funding when purchasing your commercial property in an SMSF (super).
Typically, where bank and non bank lending is concerned, the type of business real property, lenders will lend to, will determine the following factors:
This would have to be the most popular form of SMSF commercial property purchase, due to the higher commercial rental returns and the retirement and business benefits gained from purchasing an owner occupied business property. Business Real Property is the only exception to the ATO rules for transferring property assets into an SMSF.
It is also a highly beneficial strategy for owner occupied business owners for the following reasons:
It is very important that your SMSF commercial property is purchased at market value and that you rent the property at a market rental rate which is neither over market rates or under, so that you do not provide a benefit to your SMSF by charging it less for rent or by paying more rent to contribute more into super. You will need to ensure that you have a legal and enforceable lease is in place to document this arrangement as well.
Failure to do any of the above will render your fund non compliant by the ATO, resulting in penalty tax of 47% and fines and further action. One final point to consider is the risk of investing all of your super retirement savings in one asset (referred to as: concentration risk) and the very real risk of commercial property falling in value. In fact, such is the concern of falling commercial property values, that all bank lenders require regular valuations of commercial property to manage their risks.
There are other considerations when transferring business property to an SMSF, such as capital gains tax and stamp duty costs and the viability of this strategy based on the super funds trust deed and investment strategy. The good news is there are further tax exemptions for business owners and investment strategies can be varied, so it is always important to seek financial and tax advice with property in super strategies.
Tip: SMSF commercial lending takes double the time of residential lending so an extended settlement might be required.