can i use my smsf to buy a business or commercial property in australia? >>>>>

You may know that you can use your Australian self-managed super fund (SMSF) to buy a residential property, but did you know you can also use your SMSF to buy a commercial property in Australia? An added benefit of having a commercial property in your SMSF over a residential property is that if you run your own business, then your business is able to lease that property from your SMSF. At the same time, you and your relatives are not allowed to use a residential property owned in your SMSF.

Get Independent Advice

The first step if you are thinking of buying a commercial property in your SMSF is to speak to your accountant or financial advisor and make sure that it is the right strategy for you.  They can advise on the taxation and wealth impacts of buying a property and either leasing the property to a third party or leasing it to your business.  It is also important to look at the amount of cash and liquid assets that will be left in the SMSF after the purchase is complete, to make sure that you have appropriate diversification and don’t have all of your SMSF eggs in one basket.  Securing an SMSF commercial property loan is easier than you might think.

Set up your SMSF

If you do not currently have an SMSF, your accountant will be able to help you set up all of the entities required to enable you to purchase a property in your SMSF.

·       SMSF trust that needs to state that the trust is able to borrow money and invest in property. 

·       Trustee of the SMSF, generally this is corporate trustee. Your accountant will advise you on this.  The Trustee of the SMSF is the entity borrowing the money.

·       Bare trust states the property being held.

·       Trustee of the bare trust, generally this is a corporate trustee. Your accountant will advise you.  The Trustee of the Bare Trust is the entity purchasing the property and is listed on the purchasing contract.  How the Bare trustee is written on the contract is different depending on the state you are in, so make sure you get advice from your solicitor. 

Determine your maximum borrowing capacity and purchase price

It is important that you know your maximum borrowing capacity and purchase price, before going shopping for your new commercial property. It is no fun finding your dream property, only to discover that it can’t be afforded.  Your mortgage broker is best placed to assist you in working out the maximum borrowing capacity as they understand how much each lender will lend to you based on income received by the SMSF through salary contributions, rental incom,e and income generated from other investments such as shares. 

Cash held by the SMSF can also impact your maximum borrowing amount, as some lenders require the SMSF to hold a certain percentage of the total amount being borrowed, as either cash or shares after the purchase is complete. This is known as a liquidity requirement.  Your mortgage broker will take all of these points into consideration and determine your maximum borrowing capacity.

Once you have determined how much you can afford from a lenders perspective, your mortgage broker will then work out your maximum purchase price based on how much cash you have in the SMSF to contribute to the purchase, together with what your maximum borrowing amount is. 

Now that you know what your maximum borrowing amount and purchase price is, you can speak to your accountant or financial advisor to seek guidance on the appropriate price of a property for your situation.  Your financial advisor will be interested in knowing monthly repayment amounts, cash contribution required from the SMSF, and any rental income that might be received.  Your advisor may recommend that you have a specific amount of cash left in your SMSF after the purchase and this will impact the maximum purchase price of the property that you buy. 

Applying for a SMSF loan

Loans for SMSF’s are called Limited Recourse Borrowing Arrangements (LRBA).  The loan has a limited recourse if the loan defaults, as the lender can only demand the sale of the property used as security for the SMSF loan to reclaim any outstanding debt, they cannot ask that any other SMSF assets such as cash or shares are used to repay any of the loan that remains after the property has been sold.  It is important to understand that although the lender is limited to the property in the SMSF, the lender is able to demand personal assets from the directors of the SMSF trustee to pay any outstanding debt.  This is because the SMSF trustee directors sign a directors guarantee when signing on behalf of the SMSF trustee company. 

Your mortgage broker will manager the process required to submit your loan application and will work closely with your accountant and solicitor or conveyancer, to ensure that all of the documents required such as trust deeds, SMSF financials, tax returns and audits, contract of sale and SMSF bank statements are up to date and correct. 

The lender will ask for proof of the cash contribution required at settlement.  This cash contribution needs to be paid by the SMSF from the SMSF bank account.  If you have recently created your SMSF and have not yet rolled over finds from your current super account, you can then show that your current super fund has the required funds. This will be used as proof funds for the cash contribution. 

Approval of the loan through to settlement

Once the loan is submitted the process is the same as a non-SMSF loan.  Once the loan is approved, your mortgage broker and solicitor / conveyancer will work with the lender and seller’s solicitor, to ensure that settlement occurs on the required date. 

So the process of buying a commercial property in your SMSF is not as complicated as people might think. People get confused by the different types of trusts involved, however, you have your trusted advisors such as your mortgage broker, accountant and solicitor/conveyancer available to help make the process easy for you. 

Below are the main points covered today and if you have any questions or need help purchasing your next commercial property, please contact us here.  

·       You can use your SMSF to buy a commercial property.

·       Your business can lease that property from your SMSF.

·       Your SMSF provides the deposit from cash in the fund.

·       Your SMSF Trustee applies for the Limited Recourse Borrowing Arrangement (LRBA) loan

·       Rental income, investment income and SMSF contributions are used for the repayments.

·       The Bare Trust trustee purchases and holds the property until it is paid off.

·       When the LRBA loan is paid off, ownership of the property passes to the SMSF. 

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Shane Duffy is the founder of Finance Story, a finance brokerage dedicated to helping businesses grow, through arranging business loans and home loans, particularly through the use of technology. Shane has 25 years of manufacturing and supply chain experience in the areas of operations, IT, consulting and solution design. He uses this experience in his finance broking business to develop specialised financial solutions for his clients.

This article is intended as information only and does not constitute financial advice. Please seek independent financial advice when assessing the feasibility of any project.