There are a number of options available to small business owners when it comes to occupying a commercial property. The most common is, of course, a direct lease with a landlord, but with increasing rentals and low-interest rates, small business owners are looking at other ways to secure a property for their business.
Business owners often note how they would prefer to own the commercial property that is occupied by their business, but the business has an inability to finance a commercial property loan for a myriad of reasons. And purchasing a property isn’t always the right option for a business — you can read more about the pros and cons of both leasing and purchasing in this article.
For those that are confident purchasing a commercial property is the best option for their business, one way to fund this could be through a self-managed super fund (SMSF). The Australian Tax Office (ATO) allows a related party to purchase a commercial property through their SMSF for business use, provided you meet the criteria.
While this might sound simple, there are a number of requirements set by the ATO that you must comply with before you enter into any agreements.
Allison LeBusque is a partner of accounting firm TrustOne Partners and a specialist in self-managed super funds. Allison emphasises you need to have the right advice before setting up your SMSF to purchase a property.
“The Superannuation Industry (Supervision) Act has strict rules regarding related party transactions and property investments and if the trustees are in breach, they run the risk of the ATO making the fund non-complying and paying excessive amounts of tax,” she says.
You also need to ensure that a lease is in place between the SMSF and the tenant (business entity) and this will need to be provided to the auditor. When setting up the lease between the parties, it must be “commercial”, with market rent being paid by the tenant, and it is likely that you will need to provide evidence of market rental rates to the auditor. The lease must also disclose who is responsible for outgoings.
“All transactions must be at arms length,” LeBusque advises.
“The ATO requires all fund assets to be recorded at market value and it is the auditor’s job to ensure the trustee complies with this and the lease terms. The trustees must have documentation on hand and provide this annually during the audit process. If the market rate varies from what is being paid, or what is in the lease, a citation is required noting the reason.”
So how do you get started with setting up a SMSF to purchase commercial property? “You need to speak with your accountant first, and make sure they hold RG146 qualifications to provide advice on SMSF,” LeBusque says.
When it comes to purchasing property, the usual rules still apply when occupying property for your business:
- Make sure that the size of the property is suitable for your needs now and into the future. You don’t want to outgrow your property too soon;
- Ensure the buildings use is suitable for your business operation;
- Check with the local council for zoning requirements around what types of business can operate out of the property;
- Research comparable sales and market rates. You will be required to provide evidence that the purchase price is market, so you may want to consider having a sworn valuation undertaken on the property; and
- Set up the lease so that it is not too onerous on either party, taking into account any long-term changes such as the sale of the business or property.
What should be included in the lease?
- Rent. The SMSF auditor will require evidence that the rent you are paying is at a market rate, so do your research and check what similar properties have been leasing for. A rental amount of $1 per annum might lower your business overheads but it won’t sit well with the ATO;
- Lease term. Be realistic and consider any changes that could occur. Signing a shorter term lease (three to five years) with two or three further options gives you flexibility should anything change within your business; and
- Annual reviews. Most leases include annual reviews, and using the Consumer Price Index is a fair measure of what increases on the rent should be applied. You might also consider a market rent review during the term or upon renewal, but remember that you must provide evidence to back-up market rent.
Purchasing a commercial property through your SMSF can have benefits for yourself and your business, but like any major business decision, it requires research, professional advice and careful consideration. Discuss your options with your accountant and property specialist to determine what works best for you and your business.