Have you purchased a commercial property in your Self-Managed Superannuation Fund?

Adele Anthony

Adele Anthony

Principal Lawyer at Your Legacy Lawyer

Self-managed superannuation funds (‘SMSF’) are a popular structure for many Australians, particularly those who want a higher degree of control over the investment of their superannuation funds than industry funds can provide.

One benefit of having an SMSF is that you can purchase commercial property.

Often clients purchase commercial property in their SMSF and lease it back to a related party for business purposes.

There advantages of purchasing commercial property in an SMSF are that:

  • Any capital gains on realised assets (held for over 12 months) are only taxed at 10% which is lower than the individual and company tax rates;
  • Any rent paid is usually tax deductable by the business at the company tax rate of 30%;
  • If the commercial property is negatively geared, this can be off-set against any tax payable on other income generated in the SMSF.

That’s great but the SMSF trustees must also consider how purchasing a commercial property will affect payment of death benefits on the death of one of its members.

For example, if an SMSF has two members, say you and your spouse. You have made contributions of $200,000 into the super fund and your spouse has only made $800,000 in contributions into the fund. Say, the SMSF has a corporate trustee and you and your spouse are the directors/shareholders of the corporate trustee. You decide to purchase a commercial property (an office building) in your SMSF using your combined contributions of $1M. You then lease the premises back to yourself (you’re the head of an accounting firm) for business purposes.

What if your spouse passes away. As the director of the corporate trustee of the SMSF, you must pay her death benefit to her estate. If the death benefits are to be paid as a lump sum to you and your children, this will cause a liquidity issue because the SMSF funds are tied up in the commercial property. The result is insufficient funds available apart from the commercial property for you to pay the death benefit as a lump sum to yourself and your children.

The superannuation legislation in Australia requires that super death benefits are paid “as soon as practicable”. If you and your children are to take your spouse’s death benefits as a lump sum, you might have to liquidate the commercial property by putting it on the market for sale. Given there is an ongoing commercial lease of the property, you would have to place the property on the market for sale subject to the tenancy of your accounting firm. If you are unable to purchase the property yourself, this will cause a huge problem.

That’s why before you establish and make investment decisions in relation to your SMSF, please seek financial and legal advice.

Contact Your Legacy Lawyer for more information or discuss your personal circumstances.