Benefits of owning your business property in a SMSF

There are a number of benefits in adopting this strategy:

•  An important business asset is held in a tax-effective structure (super is generally more tax-effective than other investment vehicles).
• In the event of financial difficulty, creditors often find it more difficult to attack super fund investments.
• By using the capital held in a super fund, a business can have more flexibility to make better use of its own capital to build or maintain the business.
• By having your own SMSF to be the landlord, you have more freedom to add fixtures and fittings, additional capacity and make changes to the layout.

When a SMSF owns real estate and you want to lease it back to your business which is seen as a related party of the fund the property must meet the definition of business real property (BRP).

In general, BRP is real property used wholly and exclusively in the running of a business.  If the property is not BRP, then the asset will be considered to be an in-house asset. Super funds with in-house assets need to make sure that their fund’s total in-house assets do not exceed 5 per cent of the market value of all the super fund’s assets.

The official definition of BRP is quite complex. The ATO released a 70-page ruling – SMSFR 2009/1 on this topic. If a business owner needs a verification, it is recommended to contact the tax adviser to ensure your business property falls under the definition.

The brief definition of business real property according to subsection 66(5) of the SIS Act is as follows;

Business real property, in relation to an entity, means:

a)      Any freehold or leasehold interest of the entity in real property; or

b)      Any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

c)       If another class of interest in relation to real property is prescribed by the regulations for he purposes of this paragraph – any interest belonging to that class that is held by the entity;

Where the real property is used wholly and exclusively in one or more businesses(whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

When business premises are leased to a business, it’s important that the transaction occurs at “arm’s length”.

To make matters simple, it’s best that the super fund has a formal lease between in and the tenant. The terms of the lease should be independently verifiable. The super fund’s trustee must be prepared to enforce the terms of the lease. Lease payments must be paid on time or various penalty clauses must be enforced as they would for a third-party lease.

How Superhelp can Help

Superhelp can help you in the setup and annual administration of your SMSF so you can start investing in your own SMSF.

Please call us for more information on 1300 736 453.