In this guide
Despite the COVID-19 pandemic, Australia’s property markets are booming, leaving lots of investors keen to get a slice of the action. If you own a small business and have an SMSF, a simple way can be to take out a loan to buy the commercial property you use for your business and become your own landlord.
With SMSFs holding $80.1 billion in non-residential real property assets in the June 2021 quarter, it’s clear lots of trustees have already taken to the idea.
Although there’s plenty of rules you need to follow, SuperGuide has put together a simple 10-step guide on how you organise an SMSF commercial property loan and rental arrangement that will keep the ATO happy.
What are the rules for SMSF property loans?
The key one is you can only invest in a property asset through your SMSF if you meet all the ATO’s requirements. The property investment must:
- Comply with the sole purpose test to provide retirement benefits to fund members
- Not be acquired from a related party of a member
- Not be lived in by a fund member or related party of a fund member
- Not be rented by a fund member or related party of a fund member.
The SIS Act also prevents the trustees of an SMSF from borrowing money.
A big plus with commercial property investments, however, is they are exempt from the in-house assets, borrowing and related party acquisition rules. These exemptions mean your SMSF can take out a loan and buy a commercial property such as your business premises – even from one of the members of the fund. Your business can then pay rent to your SMSF.
For more about SMSF borrowing, read SuperGuide articles What are the SMSF borrowing rules? and SMSF investment rules: What every trustee should know.
Need to know
The legislation permitting SMSFs to borrow to acquire a property asset requires the loan to be a limited recourse borrowing arrangement (LRBA). In the June 2021 quarter, SMSFs had invested in $56.9 billion worth of assets through LRBAs.
Under an LRBA, the property is provided as security for the loan, but the lender does not have recourse to other fund assets if the loan is not repaid.
The SMSF borrowing rules require the property asset to be held by a separate entity called a bare trust (or holding trust).
The SMSF is the beneficiary of the trust, but the bare trustee (which cannot be the same as the SMSF trustee), acts as the registered holder of the property.
When the loan is repaid, legal ownership of the property reverts to the SMSF trustee.
How to purchase a commercial property for your SMSF
Borrowing to buy a commercial property through your SMSF and leasing it back to your business is similar to a normal property purchase. There are some important steps you need to follow, however, to ensure you don’t fall foul of the super and tax rules:
