For business owners operating out of leased commercial spaces, Australia’s solid rental market has meant that rent is becoming unaffordable in the current economic environment. Many business owners with self-managed super funds (SMSFs) are opting to purchase commercial property inside their SMSF and lease it to their business — while this doesn’t provide the business with cheap rent, what it does do is allow the business to claim a tax deduction for the rent expense while the rental income the SMSF receives helps build up a nest egg for when the business owner is ready to retire. Business owners can essentially become their own landlords with this strategy.
Can my SMSF lease a property to my business?
If you’re familiar with the rule that restricts investments involving an SMSF’s ‘related parties’, you might be wondering how it’s possible to rent a commercial space for your own business from your SMSF. The below three rules suggest that it is not possible to lease a commercial space from your SMSF, but there’s an exception!
Related party rule
The related party rule states that no one associated with your fund (meaning fund members, relatives and other associates) should be gaining a present-day benefit.
Sole purpose test
An SMSF is set up for the sole purpose of providing members with retirement benefits (or death benefits if the member doesn’t make it to retirement). For example, SMSF members can’t get away to their beach house if it’s owned by their SMSF because that would constitute a present-day benefit.
In-house assets rule
If one of your fund’s assets (for example the holiday house we mentioned) is leased to a related party then the property becomes an in-house asset. In-house assets are allowed, but they cannot make up more than 5% of your fund’s total assets.
So how does an SMSF get around the sole purpose test, related party rule and in-house assets rule? Business real property is generally exempt from these restrictions. But, the lease agreement between the member’s business and the SMSF needs to be entered into on a commercial ‘arm’s length’ basis.
What is an arm’s length basis?
All transactions through your SMSF must be made on a commercial arm’s length basis. This means there are no “mates rates” given; acquisitions and leases must be kept at market value. For the business owner, this means they can’t access a cheap rental property — but there are other potential benefits to this strategy.
Tax deductions for the business
Renting a commercial space for business purposes generally means the lessee is eligible to claim a tax deduction on the rental expense. It’s always a good idea to get advice from a taxation professional or financial planner, but generally speaking, a tax deduction will be available for the rent paid to the SMSF.
Lower tax rate on rental income
Owning property directly in your personal name means that you are taxed on the rental income at your marginal tax rate, which can be as high as 45% (plus 2% Medicare levy). Inside super, investment returns are taxed at the flat concessional rate of 15%. Investing in property through super is a potential way to reduce the tax liability on investment returns.
Rental income accumulates for retirement
While you’re busy working hard in your business, renting a commercial space from your SMSF, the rent money is accumulating in your super fund, which you can access upon retirement. The saying “rent money is dead money” only applies when you’re not your own landlord!
While this might sound like an enticing strategy, it’s important to ensure it’s right for you, your business and your SMSF. Seek financial advice if you’re unsure of whether your SMSF trust deed allows for commercial property investment.
We can help
If you’re interested in purchasing property through your SMSF, please get in touch with us at SMSF Loan Experts.
