What Should Business Owners Consider Before Choosing an SMSF Setup for Commercial Property?

For business owners, commercial property acts as both a business asset and a long-term financial consideration. Choosing an SMSF setup to invest in or hold commercial property requires a lot of research, not only finding a suitable building and arranging finances.

SMSF is governed by superannuation and tax laws. The trustees are responsible for ensuring that the fund remains compliant with the rules. The property must also fit the SMSF’s investment strategy, risk profile, liquidity requirements, and retirement objectives.

Can an SMSF Invest in Commercial Property?

Yes, an SMSF can invest in eligible commercial property. But it must comply with the superannuation laws and the fund’s investment strategy. However, you must understand that commercial property being available for purchase does not automatically make it suitable for an SMSF. It must comply with the rules, including the sole purpose of test, and trustees must consider the fund’s overall circumstances. As you start an SMSF setup, you must consider the fund’s objectives and circumstances and not just a property that you want to buy.

Does an SMSF Setup Give Business Owners More Control?

One reason to consider an SMSF setup is that you get direct involvement in making fund decisions. SMSF trustees are responsible for deciding how the fund's money is invested, provided those decisions follow superannuation rules and the fund’s investment strategy. This gives business owners more involvement in property decisions. On the other hand, you also need to make decisions ensuring the wellbeing of the funds. So, it offers greater control, but it also comes with greater responsibility.

Can an SMSF Own Commercial Premises Used by a Business? 

This depends on the situation. In some situations, an SMSF can hold business real property and lease it to a related business. For these reasons, commercial property can be relevant to business owners considering an SMSF. However, the ATO also defines business real property by reference to how the underlying real property is used. In most cases, the business use test requires the relevant real property to be used wholly and exclusively in one or more businesses.

In a nutshell, a business owner must thoroughly analyse the property, transactions, and proposed lease arrangement separately. You cannot just assume that commercial premises can be transferred into an SMSF.

What Things One Should Check Before Buying Property?

This is a smart question to ask. You must comply with certain rules so, you need to check whether the property you are buying complies with them. Here are some questions to help you find out.

• What is the property used for?
• Who will use the property?
• Does the investment fit the SMSF strategy?
• How concentrated will the fund become?
• What happens if the property becomes vacant?
• Can the fund meet ongoing Property costs?

These questions will help you learn more about the property and the SMSF setup.

Does an SMSF Need a Commercial Loan to Buy Property?

Well, there is no clear answer to this. If an SMSF setup doesn't have the required funds, it can choose a commercial loan. However, they must also abide by the rules. In an SMSF, you generally must use a limited recourse borrowing arrangement when taking a loan to purchase a single asset, such as commercial property. In this situation, specific structural requirements apply, and borrowing introduces additional costs and risks.

This means a commercial loan should not be treated as a fund borrowing; it also requires considering factors such as loan repayments, interest costs, property expenses, potential vacancy periods, the fund’s cash-flow requirements, future member benefit payments, etc.

Final Thoughts

Choosing a property to buy and choosing a property to buy under an SMSF setup are two different things. You must thoroughly assess the property to ensure it complies with the rules, and only then make the purchase. By understanding the rules, responsibilities, and costs, you can make good decisions that support long-term planning.