Self-managed superannuation funds (SMSFs) offer a significant level of freedom in choice of investment options. Those choices are even greater if you happen to be a small business owner.
One type of investment that is especially relevant for small business owners is commercial property. None of the publicly available super funds—corporate, retail or industry—will allow you to buy direct property.
However, business owners can hold the premises from which they operate in a SMSF. In fact, SMSFs are increasingly being used as an alternative to traditional ownership structures, such as family trusts and self-ownership.
An example of how this works
Gary and Susan Anderson operate a successful computer repair business. The business operates from a leased building but they feel they are now in a position to buy the premises.
The Andersons have considered purchasing the premises directly in joint names. While that structure has its advantages, there are two elements that need to be considered. One is that rent will be paid directly to Gary and Susan, adding to their taxable income. This reduces the opportunity for them to receive much else from the business in terms of salary or profits in a tax-effective manner.
Gary and Susan also need to think about retirement. Will their children be ready to take over the business ownership? Or will the couple have to rely on continuing rental income from the property to meet their living expenses in retirement?
An SMSF could instead be used in this arrangement:
The SMSF owns the business premises and receives rent from the business. Super funds pay tax at a flat rate of 15%, so this is likely to be an improved outcome. It also means that Gary and Susan may be able to receive more salary and profit from the business without pushing their tax rate too high.
In retirement, the value of this structure continues. Super funds pay no tax on income or on other gains on assets used to pay pensions to their members. This may be extremely valuable whether the Andersons retain the property (and receive rent into the SMSF) or sell it (and make a capital gain).
What about risks?
While there are several benefits of holding business premises in your SMSF, there are also a few traps to be careful of.
For the Andersons, there’s the preservation (or “restricted access”) of super fund monies to consider. Rent that is paid to the SMSF might not be accessible until Gary and Susan retire and each reaches their preservation age. Unlike the direct ownership structure, these monies can’t be used to repay personal debts or be reinvested in the business to assist any growth plans.
Structuring financial arrangements is a complex area. You should consult your financial adviser to make sure any arrangement is legal, there are no later surprises and operates to your best advantage.