Can I use my Super to buy a property to run my company from?
By Michelle
If you're paying rent for an office, warehouse, factory, shop or other business premises, you may have wondered: could I use my superannuation to buy the property instead?
Potentially, yes.
A self-managed super fund (SMSF) can potentially purchase commercial property and lease it to a business operated by a member of the fund, provided the property and arrangement meet the relevant superannuation rules. Government guidance specifically recognises that business premises may be leased to a fund member, subject to the applicable rules and market-rate leasing requirements.
That can create an interesting opportunity for some business owners: instead of your company paying rent to an unrelated landlord, it could pay commercial rent to an SMSF that owns the property.
However, there are important restrictions, and this isn't the same as simply withdrawing your super to buy a property.
How does buying business premises through an SMSF work?
The first important distinction is ownership.
You personally don't use your superannuation savings to buy the property. Instead, an SMSF purchases and owns the property as an investment for its members.
Imagine you own an engineering company that currently rents a warehouse.
You establish or already have an SMSF. The SMSF purchases a suitable commercial warehouse, and your engineering company moves into it under a commercial lease.
Your company then pays rent to the SMSF.
This type of arrangement can be possible where the property qualifies as business real property and the other SMSF rules are satisfied.
The ATO broadly defines business real property as an eligible interest in real property where the underlying land is used wholly and exclusively in one or more businesses.
That could potentially include properties such as:
warehouses and industrial units
offices
factories and workshops
retail premises
some professional consulting rooms
certain farming properties.
Whether a particular property meets the definition depends on its circumstances, so it shouldn't be assumed that a property qualifies simply because you intend to conduct some business activity there.
Can my company rent the property from my SMSF?
This is one of the important differences between commercial and residential property held through an SMSF.
Subject to the rules, business real property held by an SMSF can potentially be leased to a related party, which could include a business controlled by a member of the fund. The ATO's ruling specifically addresses the concession allowing qualifying business real property to be leased between an SMSF and a related party.
But the relationship between the SMSF and your company needs to be treated as a genuine commercial arrangement.
For example, you should expect to have an appropriate lease in place and for your company to pay market rent.
You can't simply decide that because it's "your super", your business doesn't need to pay rent, or can pay substantially less than an unrelated tenant would.
Government guidance specifically says business premises leased to a fund member must follow the relevant rules and be leased at market rates.
There is another important distinction with residential property.
An SMSF generally can't buy a house or apartment and then allow you or another related party to live in it. The rules applying to business premises shouldn't be confused with permission to use SMSF-owned residential property personally.
Can my SMSF borrow to buy the property?
Possibly, and this is where the finance structure becomes particularly important.
An SMSF doesn't necessarily need to have enough cash available to purchase a commercial property outright.
SMSFs can borrow in limited circumstances using a structure known as a limited recourse borrowing arrangement (LRBA). Under an LRBA, borrowed funds can be used to acquire a qualifying asset, with a separate holding trust forming part of the structure.
The lending side of an SMSF commercial property purchase can be more complex than a standard property loan.
A lender may consider factors including:
the property being purchased
how much the SMSF is contributing towards the purchase
the fund's assets and liquidity
rental income
the proposed tenant and lease
the SMSF's ability to service the debt
the members' contributions and financial position
the structure of the SMSF and holding trust.
The exact lending criteria will depend on the lender and circumstances. Homeloanfocus's internal lending resources also distinguish SMSF commercial lending and SMSF serviceability from non-SMSF lending, reinforcing that this is a specialist lending category rather than a standard property application.
Borrowing also introduces additional risks. Moneysmart notes that SMSF property borrowing can involve higher costs, cash-flow pressure and additional administration, and that problems with the loan or property documents can be difficult to unwind.
That's one reason to investigate the SMSF structure and the available finance before committing to a purchase.
What could buying your business premises with super look like?
Consider a hypothetical example.
Sarah and Michael own a successful wholesale business that has operated from a leased warehouse for several years.
Their current lease is approaching renewal, and they've found a commercial property that would suit the business over the longer term.
Rather than buying the warehouse personally or through their trading company, they ask whether their SMSF could purchase it.
Their advisers first need to establish whether the proposed property and transaction comply with the SMSF rules and whether purchasing the property is appropriate for the fund.
They also speak to a mortgage broker about finance.
After looking at the SMSF's available funds, the proposed purchase price, rental arrangements and borrowing requirements, they can get a clearer picture of whether an SMSF commercial property loan is viable.
If they proceed with an appropriate structure, the SMSF owns the warehouse and their company occupies it under a commercial lease, paying market rent to the fund.
Importantly, this doesn't mean Sarah and Michael personally own the warehouse.
The SMSF owns it.
The property remains an investment of the fund and must continue to be managed in accordance with the superannuation rules and the fund's retirement purpose.
This distinction matters because SMSFs exist to provide retirement benefits to their members. Moneysmart identifies meeting the sole purpose test as one of the fundamental requirements for SMSF property investment.
What should I check before buying?
Before making an offer or signing a contract, there are several questions worth answering.
First, does the property qualify for the intended SMSF arrangement? A commercial-looking property isn't automatically suitable.
Second, is buying the property consistent with your SMSF's investment strategy? Property can represent a significant portion of a fund's assets, potentially reducing diversification and liquidity.
Third, how much can the SMSF actually borrow? Don't assume the lending rules will be the same as they would be if you purchased the property personally or through your company.
Fourth, can the fund comfortably afford the property? The SMSF may need to meet loan repayments and expenses such as rates, insurance, maintenance, accounting and administration while also retaining sufficient liquidity for its other obligations. Government guidance specifically identifies cash-flow pressure and ongoing property, loan and SMSF administration costs as issues to consider.
Finally, has the structure been reviewed before you sign?
SMSF property transactions can involve your accountant, financial adviser, solicitor or conveyancer and mortgage broker. Establishing who needs to advise on each part of the transaction early can help avoid discovering a structural or lending problem after you've committed to the property.
So, can you use your super to buy a property for your company?
Yes, potentially, but there are rules you need to satisfy.
Rather than withdrawing your super and buying the premises yourself, an SMSF can potentially purchase qualifying business real property and lease it to your company on commercial terms.
And if the SMSF doesn't have enough cash to purchase the property outright, borrowing may be possible through an appropriately structured limited recourse borrowing arrangement.
The important thing is to consider both sides of the transaction before you buy: whether the proposed purchase complies with the SMSF rules and whether the finance is achievable.
If you're considering buying your business premises through an SMSF, Home Loan Focus can help you understand the lending options available and assess how much your SMSF may be able to borrow before you commit to a property.
This article contains general information only and does not take into account your objectives, financial situation or needs. It is not financial, taxation or legal advice. SMSF and taxation rules are complex and can change. Consider obtaining advice from appropriately qualified financial, taxation and legal professionals before making a decision.