Buying Your Business Premises Within Your SMSF
Self managed super funds are growing in popularity with many Australians, and anecdotal evidence shows that business owners are amongst the largest users of SMSFs.
All SMSF holders know that it is strictly against the rules to use your super balance in any way that benefits you or your business prior to retirement, and this is especially true when it comes to property transactions.
There is one area however where business owners can use their retirement funds to benefit their business prior to retirement, and this is through the ability to purchase your own business premises via your SMSF.
How it Works
Using the existing balance of your SMSF, or by borrowing additional funds through the SMSF, you can purchase business premises to be used by a business that you own or control.
Although your business can operate from the premises owned by your SMSF, the business must still pay rent to your SMSF. Not only that, but the business must pay full market rent to ensure your SMSF is not being disadvantaged.
Whilst you and your business cannot receive any advantage through reduced rental costs, there are others ways in which your business and your self managed super fund can both benefit from this arrangement.
For your business, having its premises owned by your SMSF can bring extra stability without locking up large amounts of capital.
By renting your business premises there is always the potential that the landlord could choose not to renew your lease, resulting in costly relocation expenses. However when your premises are owned by your own SMSF, you can control the leasing process.
Whilst businesses have always had the option of purchasing their own premises to guarantee stability, this is generally a very costly exercise and means having a lot of the business capital locked up in a single asset.
The main benefit for your SMSF is having a stable tenant that is more likely to look after the premises and make rental payments on time. As the business owner and the SMSF holder, it is in your best interest to keep the premises in good condition and the rental payments up to date.
Although there are plenty of benefits in owning your business premises through your SMSF, there are a number of other factors to consider before making a decision.
Depending on the size of your SMSF, purchasing a single commercial property could have a major impact on diversification within your fund.
If you have a large multi-million dollar super fund this may not be an issue, but if you have an average SMSF balance you may find that a commercial property purchase will see a dangerously high percentage of your retirement savings held in a single asset.
The danger here is that if your property or commercial property as a whole suffers a major drop in value, the value of your entire SMSF balance will suffer a similar drop. It is important to have your SMSF sufficiently diversified to avoid such dangers.
Another potential disadvantage is the lack of flexibility offered when purchasing your own business premises. If your business outgrows your premises, having to go through the buying and selling process again can be very costly when compared to simply switching leased premises.
When purchasing your own business premises via your SMSF it is important to take into account your future growth and space needs that could affect your choice of property.
Before deciding to purchase a business property within your SMSF it is important to speak with your accountant about the pros and cons, as well as the best way to structure such a purchase.