It’s easy to see the attraction of buying a residential investment property through your self-managed super fund (SMSF). Aside from the tax benefits, there is the potential for capital gains as well as rental income from tenants.

But investing in bricks-and-mortar isn’t just limited to residential. You can also purchase commercial property through your SMSF. What’s more, buying commercial real estate has some advantages over residential – particularly when you’re a business owner.

Residential vs commercial property

When you buy residential property through your SMSF, there are strict rules you need to follow. For example, the in-house asset rules and related party acquisition rules prohibit:

  • You or your family members from living in the property
  • A trustee or anyone related to the trustee leasing the property
  • The fund from buying property owned by a trustee or anyone related to the trustee

But commercial property is exempt from both the in-house asset and related-party acquisition rules – as long as the:

  • Property is solely and exclusively used for business purposes
  • Investment satisfies the sole purpose test (providing retirement benefits for the SMSF members)

That means your SMSF can buy a commercial property, even if it’s owned by a fund member or related party. Your business can then lease the property from your SMSF, so you effectively become your own landlord. Nice.

But that’s not to say there aren’t downsides to buying commercial property through your SMSF.

The cons of buying commercial property through your SMSF

For one thing, any tax losses from the property can’t be offset against your personal income tax.

You also need to make sure you’re complying with the Australian Taxation Office’s arms-length rules (if you are leasing the property to your business). This means:

  • You must rent the property at the market rate
  • You must pay rent on time, and in full

The property will also need to be regularly independently valued as part of the SMSF audit process to make sure it is meeting the sole purpose test. The trustees will need to consider both the property’s yield and any growth in value. If the numbers aren’t up to scratch, your SMSF may need to sell it.

Your fund might also need to register for GST if the commercial property produces a gross rental income of more than $75,000 per annum. This will likely add to your record-keeping and compliance burden. However, on the plus side, you may be able to claim up to 100% GST back on any expenses associated with the commercial property.

Finally, there is also a big downside for your business you need to consider. Normally, if you own your business’ premises, you can use the property as security for a commercial loan. However, this isn’t possible if it’s a SMSF commercial property.

Rhiannon Leonard is a lawyer at SMSF Conveyancer.

Looking to buy a commercial or residential property through your SMSF? You’ll need an experienced SMSF conveyancer on your team to help you with all the legalities. For professional SMSF conveyancer services, call us on 03 9070 9810 or request a quote.