Any business (that is not operating from home) will be operating from a commercial property suitable for the activities of the business whether it is an office, medical suites, shop, factory, studio, or warehouse. The ownership circumstances are either (a) owned by someone else, (b) owned directly by the business, or (c) held by the business owner in their personal name. All of these options are legitimate business models, particularly option (a) during the early years of the business where financial resources are scarce, and as the business grows, the owners often then purchase a commercial property for the business.
From a retirement perspective, the above ownership options may not be optimal; because option (a) the building belongs to another person who gets to participate in capital growth and income… the business owner therefore has no is no building asset that can contribute to their retirement. With option (b) although the building may still exist after sale of the business, ongoing rent income and capital gains (on eventual sale) remain taxable to the owner, even during their retirement, whereas this income could be tax-free and option (c) has the same result as option (b).
There is another alternative with several benefits, not only during the years it’s used in the business, but particularly during retirement of the owner.
The business owner can use a Self-Managed Super Fund (SMSF) to purchase a commercial property which is then rented to the business. The rules governing super funds allows this scenario provided there is a corporate lease agreement in place with rent charged at market rates (“mates rates” are not permitted). This arrangement is only possible with a commercial property however, it is not allowed for residential property.
When purchasing the commercial property, valid investment principles still apply. That is, make sure you are not paying too much for the property, and its size and location are suitable for your present and future needs. Getting the right property requires research, professional advice and careful consideration. If necessary, the SMSF can borrow funds to purchase the property with rent proceeds from the business together with the owner’s super contributions to the SMSF are used to make the loan repayments. A deposit for the property can be funded by rolling over funds from your existing industry or retail fund and “Mum and Dad” businesses can combine resources to boost the deposit.
Most lending agencies are prepared to provide 60%-70% loan to valuation for a SMSF. For example, a $500,000 commercial property would require a $150,000 to $200,000 deposit.
The benefits of a SMSF owning and renting a property to your business include:
- SMSFs typically have more resources available than the business plus, the business may not be able to secure finance for a commercial property,
- rent is going toward your future,
- you get the capital growth,
- the SMSF property is protected from business debts and liabilities,
- rent and super contributions are shifted from a high taxed environment (typically between 27.5% to 49%) to a 15% tax rate in a SMSF (in accumulation phase),
- capital gains tax on sale of the property are limited to 10% while the fund is in accumulation phase and tax-free in pension phase,
- the SMSF can continue renting the property to a different tenant when the business is sold, and
- during retirement all rent and capital gains from the property is tax-free.
The rules pertaining to SMSF, just like any tax rules, can be tricky so it is always best to get professional advice before doing anything.
Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.