When registering your business , an important step in the process is the registration of your office address. Most commonly, businesses tend to rent a commercial property through a landlord. However, as rental prices are increasing and interest rates are lowering, many small business owners are looking for other ways to secure a business location.
For business owners who are confident that purchasing a commercial property is the best option for their business, one way to fund this is through a self-managed super fund (SMSF).
Buying property through an SMSF can be a powerful way for business owners to build their super while ensuring that they can live the life they want to live during retirement. However, if choosing to go down the avenue of purchasing commercial property for business, it’s important to be clear about your obligations and have the time, money and ability to meet them.
How much money do you need to start an SMSF?
The amount of money required to start an SMSF depends on whether you plan to do administration work yourself or not.
According to the Rice Warner report , if you intend to appoint an administration company to provide a full service for your SMSF, you’ll need $500,000 in super to make an SMSF cost-effective. If, however, you plan to do some administration work yourself, having $200,000 in super funds is enough to make an SMSF a cost-effective option.
How much money can you borrow?
Banks will allow SMSF’s to borrow up to 80% of the property value. However, it’s more desirable to have at least 50% deposit so that the property is positively geared.
Benefits of buying commercial property with your SMSF
Rent the commercial property you invest in
The majority of commercial properties purchased through an SMSF are leased back to a business operated by an SMSF member. If a member of a fund runs a business, an SMSF fund can invest 100% of its money into commercial real estate. An SMSF can also borrow to purchase a commercial property.
Pay rent to yourself, not a landlord
Rather than paying rent to a landlord, investors can pay rent to their superfund when a property is purchased through an SMSF. Tax on rental income is only 15% and capital gains at 10% if a property is kept for more than one year.
Drawbacks to buying commercial property with your SMSF
Tax losses from property can’t be offset against personal income tax.
Market rate lease
If a property is leased to a business you run, the lease must be at market rate – no mate’s rates.
You can’t skip rental payments. Fees must be paid in full, on time.
The property must be independently valued regularly.
Purchasing a commercial property with an SMSF must be for the sole purpose of providing retirement benefit to the SMSF member.