Should my SMSF own my Business Premises?
Many Small Business Owners are taking advantaging of using their Self Managed Super Fund (SMSF) to own their business premises – whereby the SMSF acts as the landlord and leases it to the business. Since this legislation changed to allow SMSF borrowing in 2007 there has been a surge in SMSF property investment – people are taking advantage of the tax benefits of these arrangements.
This setup has multiple advantages for the business such as:
- Security of tenancy which is good for business
- The SMSF continues to grow through rental earning. This is a big one for small business owners, where the temptation can be stop contributing to their super fund. Business owners are legally required to pay market rate rent to the SMSF so it forces them to keep contributing to their super.
- Potential tax benefits for the business (the rent paid to the SMSF is tax deductable). For the SMSF rental income is taxed at 15% - so overall less tax is paid than if the business owns its own premises. Also the capital gains payable upon sale of the premises will generally be less when the premises was held by the SMSF.
If you are taking advantage of this arrangement, you should ensure that all transactions remain at arms-length, otherwise the SMSF income could incur tax penalties, and the SMSF trustee could be subject to ATO compliance directions and penalties.
What defines “arms-length?” – this essentially means that all transactions need to take place in the same way they would if the tenant was an unrelated party. You are going to need to draw up a commercial lease and have it signed by both parties. The rental rate needs to be the market rental rate, and needs to be paid at regular intervals. Rental reviews needs to take place just as they would for any other tenant, and if rent is to be paid late then this needs to be documented as well. The SMSF should also take out adequate insurance for the property being purchased.
An added benefit to this arrangement is that your SMSF can also borrow funds to purchase the property – so you are not limited to the funds you have already accumulated in your SMSF, and if you were otherwise going to purchase the property through your business. It can also provide an extra layer of protection against creditors should the business go belly up – though this is not iron-clad.
If this is something you are interested in, please give us a call to see if this would work for you. We can help you with setting up your SMSF if you don’t already have one, and more importantly help you do it in the right way so that you get the most benefit from this arrangement.