Superannuation funds allow Australians the ability to build on their financial future over the course of their working lives so they can still enjoy a healthy income during retirement.
With retail and industry super funds, trustees decide on the mix of cash, property, shares or bonds to invest in.
But for those with money to invest and the appropriate set of skills and knowledge-base, self-managed superannuation funds (SMSF) offer complete control over the design and operation of their financial planning.
What Is A Self-Managed Super Fund?
Unlike retail or industry super funds, where a trustee makes the day-to-day investment and insurance decisions for you, self-managed superannuation funds provide Australians with a more flexible, hands-on method of controlling their personal investment strategies and objectives. You manage it yourself.
Because SMSF members are their own trustees, investments can easily be switched or modified as members see fit. And SMSF members are able to invest in a range of assets, including commercial real estate.
SMSFs And Commercial Real Estate
The term “commercial real estate” refers to property used for business purposes. And it generally comes in three forms; industrial, office or retail.
An SMSF is able to purchase commercial real estate using cash, or a combination of cash and a limited recourse borrowing from a bank. Certain restrictions apply when borrowing is used in a SMSF and Trustees should seek professional advice before entering into these arrangements.
Higher Returns On Your Investment
Investing in commercial property presents a number of advantages over investing in residential real estate.
According to CoreLogic RP Data, the average rental return on residential properties across Australia’s capital cities is 3.6%.
With commercial properties, owners can receive a significantly higher return on their investment; usually between an 8% – 12% gross rental yield. But as with anything, results can and do vary.
Better Lease Terms and Conditions
With residential properties, it’s not uncommon to experience tenant turnover every six to twelve months.
When you invest in a commercial property, the length of a lease can range from one to ten years.
And because commercial tenants tend to invest capital in customising or improving the premises, they also tend to occupy locations for longer, uninterrupted periods of time, resulting in a stable return on investment.
Save on Outgoings And Rates
With a residential property, the owner is responsible for paying council and water rates, taxes and body corporate. Plus the cost of insurance, maintenance and building repairs.
With a commercial real estate lease, the tenant typically pays these outgoing costs. Which means the owner keeps more of the rent they collect as profit. Again, this can vary depending on the specifics of a particular arrangement.
An Investment For Your Business
An investment in commercial real estate can be a great way to diversify your portfolio. And enjoy a substantial cash flow injection.
But collecting rent from tenants isn’t the only reason a SMSF member might decide to purchase commercial property.
If a SMSF member happens to be a business owner, Business Real Property bought through an SMSF can be leased back to the SMSF member and their business (please note the rent needs to be at commercial rates and the agreement on an arm’s length basis).
In this way, the investor effectively pays rent to themselves. And not to a landlord.
What Is Business Real Property?
According to Section 66 of the Superannuation Industry Supervision (SIS) Act 1993, “business real property” is defined as, “any freehold or leasehold interest of the entity in real property where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not).”
Transferring An Existing Property
Let’s say a SMSF member already owns their business premises and it meets the definition of Business Real Property.
Transferring the property into their SMSF can be an effective way to protect assets, minimise taxes and release equity to help fund business growth.
Whether purchased outright by the SMSF using cash currently within the fund, through a Limited Recourse Borrowing agreement that covers any shortfall, or as an in-specie transfer where property is contributed as an asset in place of cash (up to the relevant contribution limits), transferring in an existing commercial property often protects the value of your property in the event of bankruptcy, litigation or fluctuations in the marketplace and helps build retirement funds.
If a member sells / transfers commercial real estate into their SMSF they may trigger a capital gain.
Where this commercial real estate is used in the members business, however, there are a number of concessions that may apply to reduce this gain. In addition to a general 50% CGT discount, there are a number of other Capital Gains Small Business Concessions that may benefit the members.
The Small Business 15 Year Exemption grants members aged 55 or over who have owned their business for 15 years or more the ability to sell their business tax free if they are retiring or have become permanently incapacitated.
The 50% Active Asset Reduction is an optional concession that reduces a small business’ capital gain by 50%; creating a smaller taxable figure for SMSF members.
Any remaining capital gain, after the general 50% CGT discount and optional 50% Active Asset Reduction have been applied can be eliminated with the Small Business Retirement Exemption. This amount stays tax free so long as it remains under the lifetime limit of $500,000.
Stamp Duty Exemptions
Depending on the state or territory you live in, stamp duty taxes levied on the transfer of a property can total in the tens of thousands and make the transfer of business real property into an SMSF cost prohibitive.
There are significant concessions on stamp duty available in certain states when transferring business real property into your SMSF.
For example, in NSW stamp duty on a commercial property valued at $750,000 is more than $29,000.
However, when transferring that same property to an SMSF, there is only a one-time fee of $500 so long as all applicable conditions are met.
Where specific matters of local stamp duty are concerned, the advise of an SMSF specialist lawyer is always recommended.
More Retirement Savings
Since all income and capital growth goes directly into the fund, retirement savings grow faster within your SMSF.
Loan interest is tax deductible to the fund. Rent is taxed concessionally at 15%. Capital gains tax (when the property is eventually sold) is usually capped at 10%, however, when the members are in pension phase, the rate may be reduced to nil. Overall the tax rates in superannuation are much lower than the marginal tax rates that apply to individuals which are as high as 47%.
Thanks to the renewed flexibility of SMSF legislation, investing in commercial property is no longer exclusive to high-net worth investors. The playing field has been levelled. And the opportunity to include business real property as part of an overall retirement strategy becomes a reality for more and more Australians every year.
With SMSFs opening up new commercial investment options all the time, it’s worth speaking with an accounting expert to learn more about how using your self-managed superannuation to invest in commercial real estate can help you reach, and exceed, your retirement goals.
Who can advise me about setting up an SMSF?
From 1 July 2016, accountants need to be licensed to provide you with financial product advice in regards to your SMSF, including setting up an SMSF or purchasing property through an SMSF. Licensed accountants have completed the appropriate training and met the stringent ASIC requirements – resulting in better advice for you. Unlicensed accountants will be able to provide limited SMSF services, however, will be unable to answer all questions a trustee may have or provide advice on key SMSF strategies, such as contributions, investments, pensions, estate management, setup and windup.
At Kennedy Barden we know our clients value our advice, so we have invested in an Australian Financial Services license which allows us to provide advice in all areas of SMSF.
The contents of this publication are general in nature and we accept no responsibility for persons acting on information contained herein. From time to time we may bring to your attention products, services or other information that may be relevant to you.
If at any time you no longer wish to receive this information, you may opt out by contacting us on (02) 4365 6789. This document contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision.
Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.
The financial advisers at Kennedy Barnden Financial Services are authorised representatives of Charter Financial Planning Limited ABN 35 002 976 294 Australian Financial Services Licensee Licence Number 234 665.