7 key considerations when buying commercial property through an SMSF
Investing in commercial property through a self-managed super fund (SMSF) can be a powerful strategy for building long-term wealth, especially for professionals and business owners. However, it’s a complex process that demands careful planning and compliance with strict regulations.
Here are seven (7) critical things to consider before you take the plunge.
Is the property an “arms-length” investment?
All transactions through your SMSF must be conducted on a commercial, arm’s-length basis. That means if you’re purchasing a property your business will occupy, the SMSF must lease it to your business at market rates and under standard commercial terms. This ensures compliance with ATO rules and protects the integrity of your fund.
Do you meet the sole purpose test?
The property must be purchased solely to provide retirement benefits to SMSF members. You cannot use the property for personal purposes, nor can related parties use it unless they’re paying commercial rent and the use is genuinely business-related. Failing this test can result in penalties and fund disqualification.
How will you fund the purchase?
Your SMSF can purchase property outright with available funds or borrow through a limited recourse borrowing arrangement (LRBA). LRBAs add complexity and must be structured carefully to avoid compliance breaches. Consider the deposit requirements, borrowing capacity, and cash flow implications for the fund.
Is the property a sound investment?
While the tax advantages of SMSF ownership are appealing, the property still needs to stand on its own as a smart investment. Evaluate the location, tenant demand, lease structure, outgoings, and long-term growth potential. The fund’s investment strategy must support the decision.
What are the tax implications?
Income and capital gains within an SMSF are taxed at concessional rates—15% during accumulation phase and potentially 0% in pension phase. However, GST and stamp duty may still apply to the property purchase. Structuring the transaction correctly is crucial for maximising tax efficiency.
How will ongoing costs be managed?
All property expenses—such as rates, insurance, maintenance, and repairs—must be paid from the SMSF. This can impact the liquidity of the fund, particularly if rental income fluctuates. Having a clear cash flow management plan within the SMSF is vital for sustainability.
Do you have the right professional support?
Buying commercial property via SMSF requires coordinated advice from your mortgage broker, accountant, financial adviser, and solicitor. Missteps can lead to compliance breaches or financial underperformance. Surround yourself with professionals who understand SMSF lending and property investment.
Final thoughts
Owning commercial property through your SMSF can deliver significant advantages—especially for business owners looking to pay rent to their own fund instead of a landlord. But it’s not a decision to make lightly. By carefully considering the factors above and working with experienced professionals, you can take full advantage of the opportunities while avoiding common traps.
If you’d like tailored advice on SMSF loans or want to explore your borrowing power, I’d be happy to help. Get in touch for a no-obligation consultation.