If you’re a trustee of an SMSF, small business owner, or want to purchase commercial property and/or sell your existing business premises, you may be able to borrow money to buy a commercial property through your super fund.
What are the benefits?
Pay no Capital Gains Tax on selling a business within super during the pension phase
The strategy may be able to unlock a significant amount of cash for your business
Your other SMSF assets are secure as the lender only has recourse to the asset purchased through the commercial loan and held by the Security Trust, plus any security provided by a guarantor
Rental income from the property and superannuation contributions are used by the trust to help pay off the loan
The trust is able to offset loan interest and expenses against rental income. Your SMSF is entitled to any net income of the trust (taxed at concessional rates).
How does the strategy work?
You wish to buy a commercial property through your SMSF but cannot fund the full purchase price. However, you do have enough funds for a percentage of the purchase price. The SMSF can purchase the property under a limited recourse arrangement, subject to certain criteria. The SMSF provides the funds for a partial payment of the property, pays all relevant fees and borrows the remaining funds to pay the balance.
The property is owned by a separate Security (Bare) Trust with your SMSF having a beneficial entitlement to it. The Security Trust may then lease the commercial premises on commercial terms. The Security Trust receives lease payments from the lessee and additional instalments from your SMSF. These are used to pay expenses and loan repayments relating to the premises.
The property will be the sole security for the loan under a limited recourse loan. In the event of default, the lender only has recourse to the property, and any security provided by a guarantor, and cannot claim on any other assets within your SMSF.
After the loan is repaid, the SMSF then has the right, but not the obligation, to acquire legal ownership of the business premises.
The arrangement will be entered into by:
The Trustee of the complying Superannuation Fund, as borrower
The Security Trustee, as guarantor and mortgage provider
The Lender, they may ask for guarantees from directors/members acting in their personal capacity as guarantors (not in their capacity as Trustee or members of the super fund).
Some things you should consider
Your SMSF trust deed must allow borrowing under a limited recourse arrangement
Investment in the business premises should be consistent with your SMSF’s investment strategy
The limited recourse arrangement must meet certain requirements to ensure that the SMSF remains compliant
Your SMSF requires sufficient cash-flow to service loan repayments over the term of the loan. Cash-flow may be sourced from investment earnings or member contributions
Arrangements must be at arms length and transacted at market rates
You should weigh up the benefits of the strategy against the costs of setting up and maintaining the limited recourse arrangement
You should ensure that you obtain appropriate financial and legal advice on your specific situation to ensure the benefits outlined overleaf will be available to you before undertaking this strategy.
The team at Naritas Finance