Can Your SMSF Buy Your Business Premises?

7 Rules Business Owners Need to Know.

An SMSF can potentially buy commercial property and lease it to a business operated by an SMSF member or related party. However, the property needs to qualify as business real property, transactions must be on commercial arm’s-length terms, and the investment must comply with SMSF rules.

For many business owners, buying their business premises through a Self-Managed Super Fund (SMSF) can be an attractive long-term strategy.

Instead of paying rent to an unrelated landlord, your business may be able to lease the premises from your SMSF, with the rent becoming investment income of the fund. This strategy can potentially be used for offices, factories, warehouses, workshops, retail premises and medical or professional consulting rooms.

Here are seven important rules to understand before buying business premises through your SMSF.

1. The Property Must Generally Be Business Real Property

Business real property is broadly real property used wholly and exclusively in one or more businesses, subject to specific rules and limited exceptions.

This distinction is particularly important if an SMSF is acquiring property from a member or another related party.

Examples may include:

• offices and professional premises
• warehouses and factories
• retail premises
• medical centres and consulting rooms
• workshops and certain farming properties

Residential property generally cannot simply be transferred into your SMSF or leased to your business and assumed to qualify.

Whether a particular property meets the definition should be established before entering into the transaction.

2. Your Business Can Potentially Lease the Property From Your SMSF

One of the attractions of this strategy is that your business may be able to operate from premises owned by your SMSF.

For example, a medical practice could operate from a medical centre owned by the practice owner's SMSF. The business pays rent to the SMSF, while the SMSF holds the property as a long-term retirement investment.

However, because the SMSF and business are related, strict rules apply to how the arrangement is managed.

3. The Lease and Rent Must Be Commercial

Your business cannot simply pay whatever rent you choose because you control both the business and SMSF.

Transactions between an SMSF and related parties need to be conducted on an arm's-length commercial basis.

A proper arrangement should generally include:

• a documented commercial lease
• market-based rent
• regular rent payments
• appropriate rent reviews
• clear responsibility for expenses and outgoings
• records supporting the arrangement

The SMSF trustee must treat the property as a genuine investment of the fund rather than simply an asset available for the business owner's benefit.

4. Your SMSF May Be Able to Buy Business Premises You Already Own

SMSFs are generally restricted from acquiring assets from related parties. However, qualifying business real property can be an important exception. This means there may be circumstances where an SMSF can acquire business premises currently owned personally by a member or another related party. The transaction must still comply with SMSF and market-value requirements.

There can also be significant tax and transaction considerations, including capital gains tax, stamp duty, GST, contribution rules and the SMSF's available cash.

This is an area where getting advice before transferring the property is particularly important.

5. Your SMSF May Be Able to Borrow to Buy the Property

An SMSF can potentially borrow to purchase commercial property using a Limited Recourse Borrowing Arrangement (LRBA). An LRBA is different from an ordinary property loan and specific rules apply to the property, ownership structure and borrowing arrangement.

There can also be restrictions around what can be done to a property while an LRBA is in place, particularly where significant improvements or redevelopment are planned.

If finance is required, the SMSF, loan and property ownership structures should be reviewed before you sign the contract.

6. The Property Must Fit Your SMSF Investment Strategy

Buying your business premises should make sense as an investment for your SMSF, not simply because owning the property would benefit your business.

Trustees need to consider factors including:

• diversification
• liquidity and cashflow
• loan repayments
• fund expenses
• risk and return
• members' retirement requirements

For example, investing a large proportion of an SMSF's assets into one commercial property could create liquidity and diversification risks.

The strategy therefore needs to be considered in the context of the members' broader retirement objectives.

7. Get the Structure Right Before Signing the Contract

This is perhaps the most important point.

With an SMSF commercial property purchase, there may be several interconnected elements:

SMSF → Property ownership → Finance → Business tenant → Commercial lease

If borrowing is involved, additional structures may also be required.

Trying to correct an SMSF property structure after contracts have been exchanged can be difficult and potentially costly.

Frequently Asked Questions

Can my SMSF buy the building my business operates from?

Potentially, yes. An SMSF can own qualifying commercial premises and lease them to a related business where the property and arrangement satisfy SMSF requirements.

Can my business pay rent to my SMSF?

Yes, in an appropriate structure. The lease should be commercially documented and the rent and other terms should be on an arm's-length basis.

Can my SMSF buy commercial property from me personally?

Potentially. While SMSFs are generally restricted from acquiring assets from related parties, qualifying business real property can be an exception. Specific SMSF and market-value requirements still apply.

Can my SMSF borrow to buy my business premises?

Potentially, yes. SMSFs can borrow in limited circumstances using a compliant Limited Recourse Borrowing Arrangement (LRBA).

Can my SMSF buy a medical centre, office or warehouse?

Potentially, yes. Medical centres, offices, warehouses, factories and other commercial premises may qualify, depending on the property's use and the fund's circumstances.

Can two SMSFs buy a commercial property together?

It may be possible, but joint ownership can introduce additional SMSF, finance, legal and exit-planning considerations. The ownership structure should be reviewed before contracts are signed.

Is buying business premises through an SMSF a good idea?

It can be an effective long-term strategy for some business owners, but it isn't suitable for everyone. The SMSF's balance, liquidity, diversification, borrowing requirements, tax position and members' retirement objectives all need to be considered.

Considering Buying Your Business Premises Through an SMSF?

Buying commercial property through an SMSF can provide business owners with an opportunity to combine property ownership, superannuation and long-term retirement planning. However, getting the structure right from the beginning is critical.

At Cashflow Financial, we can help you understand the accounting, taxation and SMSF considerations before you proceed. 

Thinking about buying your business premises through an SMSF? Talk to one of expert team at Cashflow Financial. We are here to help.

If you're a business owner in Wollongong, the Illawarra or Shoalhaven considering an SMSF commercial property purchase, contact us to speak with our Wollongong team.

If you're in Sutherland, Cronulla, Miranda, Caringbah or elsewhere in the Sutherland Shire, our Sutherland team can help you understand your SMSF property options. We are here to help.

This article provides general information only and does not constitute personal financial, taxation or legal advice. SMSF and property transactions can be complex and advice should be obtained based on your individual circumstances.