Transferring a business premises to an SMSF definitely has its advantages but there are also traps that you need to be aware of.
Transferring the business premises, referred to as “real business property”, into a SMSF is a good way of extracting funds out of the business, in a tax effective way. It means the business owner is paying rent to the super fund, rather than to some third-party landlord. It is one of the few ways to utilise superannuation investments in the business.
But in the rush to transfer the business property to the SMSF, investment fundamentals should not be forgotten. A key consideration is that holding the property in the SMSF has to make sense from an investment, tax and income perspective, and not simply because property is viewed as the hot asset class of the moment. So what are some of the traps you need to be aware of:
- Make sure the property being transferred is transferrable to your SMSF
Only property that is solely used for business can be transferred to your SMSF. This means it cannot be part commercial and part residential. For example a shop with a residence on the second floor cannot be transferred unless the shop and residence are on separate titles and only then, the shop can be transferred to the SMSF.
According to the Australian Taxation Office, vacant land cannot be transferred to an SMSF.
Also business real property cannot include company title or shares in a company that solely owns the business property. It also does not include the business property’s furniture or non-fixtures.
- Diversification risk
If the business premise is the only asset of the superannuation fund, questions should be asked as to whether it is the best option. There are a number of problems in having a large portion of superannuation savings tied up in one asset. Having one dominant asset class brings increased risk to any superannuation portfolio. And having only one asset in that asset class exacerbates it further.
- Liquidity risk
Additionally, property is usually illiquid, which may cause issues for the SMSF, particularly if any of the fund members are in pension phase and also need regular income from the fund. That is the business property may not generate enough income to pay the minimum pension percentage.
These liquidity issues can be long-ranging and difficult to foresee, and can be triggered by the death of a fund member. For example, if two business partners are in a SMSF that was set up for the express purpose of owning the business property and one of them dies, the business property may have to be sold to pay out death benefits.
- Having your retirement savings too closely linked to your business
There is also the risk of having one’s retirement benefits linked to one’s business. It may be that the business premises may not be the best type of investment to hold in the fund, as commercial properties can have lower rates of growth than residential properties or other asset classes. Also, if the business falls behind in rental payments and the fund takes no action to recover the shortfall, then the fund’s compliance status is at risk because the fund is effectively providing financial assistance to a related party, which is a breach of the SMSF investment rules.
There is no question that property investment can reward SMSF investors with capital growth and steady rental income. The decision whether to transfer the business property into the SMSF is a matter of determining not only the investment merits of the business real property in question, but also the current and future needs of the members of the SMSF.
Andrew Yee, director, superannuation, HLB Mann Judd Sydney.