Investing in a business premise through a self-managed super fund (SMSF) is popular investment strategy among small business owners in Australia.
While SMSFs are not permitted under Australia’s superannuation rules to purchase a residential property that is owned by a member or anyone related to a member, SMSFs are allowed to lease a business property – or business real property – that is run by a member or a related party.
Business real property is an exception to the in-house asset and related party acquisition rules. As stated on the ATO website, business real property refers to land and buildings used wholly and exclusively in a business.
Before an SMSF invests in business real property, trustees must ensure the level of investment still meets the investment strategy of their SMSF, including diversification of assets, liquidity and maximisation of member returns in your fund.
In most cases, opting to own your business property through your SMSF can be a financially rewarding investment. The strategy ensures tenancy security and also helps business owners save more money for retirement since they are paying rent to their super fund at the market rate. It also allows SMSF trustees to hold a valuable asset in a
more tax-effective structure.
However, SMSFs that lease the business premises to the business must ensure all transactions undertaken are on an arm’s length basis to avoid a conflict of interest. The purchase and sale price of the business premise must always reflect true market value and the income from the business premise should always reflect a true market rate of return.
This means transactions must be carried out on a commercial basis i.e. as if there is no relationship between the SMSF and the business.
To ensure this happens, the SMSF must have a formal commercial lease in place between itself and the tenant (the business). The written lease agreement should be signed by both parties and include information such as terms of the rental payments and what should happen if or when the rent cannot be paid.
SMSF trustees must be prepared to enforce the terms of the signed lease. For example, it is not acceptable for rent payments not to be made purely because the business is not doing well financially.
Those who fail to comply with the arm’s length rules may come under scrutiny from the ATO, which can impose significant penalties, including disqualifying trustees and prosecution.