Purchasing commercial premises using your superannuation can be a financially rewarding investment strategy. Here, Chartered Accountant and SMSF advisor Peter Quinn explains the benefits of buying your business premises in your superannuation fund.
Purchasing commercial premises using your superannuation can be a financially rewarding investment strategy. Since the 1980s people have been managing their own superannuation. Unfortunately, in the 1980s the only superannuation investments were shares or cash. Not many investors had accumulated sufficient cash in their superannuation fund to purchase property, certainly not in the major capital cities of Australia.
In 2008, the legislation was changed to allow a specific type of borrowing within superannuation, commonly referred to as the instalment gearing provisions. As a result of that change in legislation people were able to borrow to purchase investment assets within their superannuation fund and in recent years people have used this change in legislation to enable them to borrow money to purchase an investment property within their superannuation fund.
While many Australians are uncomfortable borrowing to purchase shares or managed funds, given Australians love affair with property and given that they have very likely gone through this experience to purchase their family home, this has become a very popular strategy.Here are a few reasons why SME business owners might consider purchasing their business premises with superannuation.
- Most Australians and particularly astute business owners hate paying rent and would prefer to pay debt off an appreciating asset. That is, if you are going to be in business for the next 20 years and you are not looking to relocate your business, as you have built up location goodwill, you would prefer to purchase these premises now and pay off the debt rather than renting these same premises for the next 20 years.
- Most business owners have accumulated assets within their superannuation. Say, for example, a business owner has (a) $200,000 in superannuation and his business premises are worth $800,000. If he was considering purchasing these premises and holding onto these premises until he retires he could use the $200,000 in his superannuation fund plus bank debt of $600,000 in his superannuation fund to buy the premises through his superannuation fund. Or (b) he could borrow $800,000 from the bank and buy them for $800,000 in his own name. Many people prefer the first option since (a) the bank will not lend 100 per cent to buy business premises, and (b) they have less debt by borrowing via the superannuation strategy and they have no intention to sell the business premises until they retire.
- If the property is purchased in the superannuation fund you can use the 9.25 per cent compulsory super plus the commercial rent your business pays to the superfund to pay off the $600,000 debt a lot sooner than if the debt was in your name.
- In retirement, you could sell your business but retain the business premises. The new business owner would continue to pay your superannuation fund rent for you to live off in your retirement.
- Asset protection. This asset is now owned by the superannuation fund, not you and not your business. If your business fails for any reason, the superannuation asset is protected from these bankruptcy/liquidation proceedings.
- Under current legislation, if you retire and sell your business premises it is possible that given you are over 60 and retired, the capital gain can be tax free. This may not be the case if the property is owned by you or your business.
- If you are over 60 and receiving your rent as an income stream for your retirement, under current legislation it is possible for this rent to be tax free.
- From your superannuation perspective, some business owners are holding a lot of cash in their superannuation. This may be as a result of a bad experience with shares or managed funds and are reluctant to take excessive risks.
Depending on the location of the business, many business owners see the rent expense increasing on their business and the surrounding properties escalating in value. Many business owners feel they are paying off their landlord’s property but have insufficient funds outside of super to purchase the property. This strategy may create an opportunity not previously considered.
Peter Quinn is a Chartered Accountant, Certified Financial Planner and Self Managed Super Fund Specialist Advisor.