Should I transfer my business property into my SMSF?
Owning your business premises inside your self-managed super fund (SMSF) is one of the most common reasons business owners set one up. Done well, the rent your business pays goes into your own retirement savings at a low tax rate, rather than to a landlord. Done badly, it ties up most of the fund in one asset and can breach the super rules.
How it works
Super funds generally can’t buy assets from members or relatives. Business real property is the main exception: land and buildings used wholly and exclusively in a business. Your fund can buy your premises from you (or your company or trust) at market value, then lease them back to your business at market rent under a written lease.
The transfer can be made in cash, or partly as an “in-specie” contribution of the property itself, which counts towards your contribution caps.
The benefits
- Low tax on rent. The fund pays 15% tax on rental income while members are in accumulation, and nil on income from assets supporting a retirement pension.
- Low tax on the eventual sale. A capital gain on property held more than 12 months is taxed at an effective 10% in accumulation, and nil if it’s supporting a pension.
- The business still gets a deduction for the rent it pays.
- Small business CGT concessions. If you’re selling the property to the fund, the concessions (including the 15-year exemption and the $500,000 lifetime retirement exemption) can reduce or eliminate the capital gain, and amounts contributed under them may not count towards your non-concessional cap.
- Asset protection. Assets in super are generally protected from the creditors of the business and its owners, within limits.
- Succession. The property can stay in the family’s super after you retire, with the business continuing to rent it.
The costs and risks
- Stamp duty. Moving property into the fund is a transfer, and NSW duty can apply. There are limited concessions in some circumstances [check: confirm current NSW duty treatment for transfers of business property to an SMSF].
- Capital gains tax if the concessions don’t fully cover the gain.
- Liquidity. A building can’t be sold in pieces. If the fund needs to pay a pension or a member leaves, a fund that’s mostly one property can struggle for cash.
- Concentration. Having most of your retirement savings in one building, leased to one tenant (your own business), is a lot of risk in one place. The fund’s investment strategy has to address it.
- The business has to pay the rent. In a tough year, the rent is still due at market rates. Not charging it, or charging less, is a breach.
- Locked away. Once it’s in super, the property can’t be accessed until a member meets a condition of release.
The rules that trip people up
- Wholly and exclusively. The property must be used entirely in a business. Premises with a flat upstairs that you live in don’t qualify.
- Market value and market rent. Get an independent valuation for the transfer and review the rent regularly.
- A proper lease with the business, on commercial terms, and rent actually paid.
- No personal use. You can’t store your boat there or let a relative use it rent-free.
- Borrowing. If the fund borrows to buy, it must use a limited recourse borrowing arrangement with a separate bare trust, and borrowed money can’t be used to improve the property.
Is it right for you?
It tends to work best when the fund already has, or will soon have, enough other assets to stay diversified and liquid, the business is stable enough to pay market rent for years, and the property suits your long-term plans.
Every case needs modelling: the CGT and duty on the transfer, the contribution caps, the cash flow for the fund and the business, and how it fits your retirement. Our SMSF Specialist works through it with you, Judge Lending can arrange an SMSF loan if one is needed, and our SMSF administration keeps the fund compliant once the property is in.