Self-managed super funds (SMSFs) are a popular option for Australians who want to have more control over their retirement savings. SMSFs allow you to invest in a wide range of assets, including shares, property, bonds, and cryptocurrencies. But did you know that you can also use your SMSF to finance your business growth? In this article, we will explain how you can leverage your SMSF for business purposes, what are the benefits and risks, and what are the rules and regulations you need to follow.
What is an SMSF and how does it work?
An SMSF is a type of superannuation fund that is set up and managed by its members, who are also the trustees. An SMSF can have up to four members, who are usually related or have a common interest. An SMSF is different from other super funds, such as industry, retail, or corporate funds, because it gives you more flexibility and choice over how you invest your money. You can decide what assets to buy and sell, how much risk to take, and how to manage your tax and fees. However, with greater freedom comes greater responsibility. You have to comply with the superannuation laws and regulations, keep accurate records and reports, and ensure that your SMSF is audited annually by an approved auditor.
How can you use your SMSF to finance your business growth?
One of the ways you can use your SMSF to grow your business is by purchasing a commercial property that your business can use or lease. This can be a smart strategy to diversify your SMSF portfolio, generate income for your retirement, and reduce your business expenses. However, you have to follow some rules to make sure that your SMSF investment is legal and compliant. Here are some of the key points you need to consider:
- You can only buy a commercial property that is used wholly and exclusively for business purposes. You cannot buy a residential property or a mixed-use property that has both residential and commercial components.
- You have to buy the property at an arm’s length basis, which means that the price and terms of the transaction are fair and reasonable, and reflect the market value. You cannot buy the property from a related party, such as yourself, your family, or your business partners, unless the property is classified as business real property (BRP). A BRP is a property that is used exclusively for business activities and has no significant personal or private use.
- You have to lease the property to your business at a market rate, which means that the rent and conditions are comparable to what a third party would pay or offer. You cannot lease the property to yourself or a related party for free or at a discounted rate, unless the property is a BRP.
- You have to ensure that your SMSF has enough cash flow to cover the costs of owning and maintaining the property, such as loan repayments, interest, taxes, insurance, and repairs. You cannot use your personal or business funds to pay for these expenses, unless you make a contribution to your SMSF and claim a tax deduction.
- You have to keep the property separate from your personal or business assets, and register it in the name of your SMSF or its trustee. You cannot use the property as a security for your personal or business debts, or transfer it to yourself or a related party without paying the market value.
What are the benefits and risks of using your SMSF to finance your business growth?
Using your SMSF to buy a commercial property for your business can have several advantages, such as:
- You can diversify your SMSF portfolio and reduce your exposure to market fluctuations.
- You can generate a steady income stream for your SMSF from the rent payments, which can help you grow your retirement savings and meet your minimum pension requirements.
- You can benefit from the capital appreciation of the property over time, which can increase the value of your SMSF and your retirement nest egg.
- You can save on your business expenses by paying rent to your SMSF instead of a third party, and claim a tax deduction for the rent payments.
- You can enjoy the tax concessions of your SMSF, such as paying a lower tax rate of 15% on the rental income and capital gains, or no tax if your SMSF is in the pension phase.
- You can protect your property from creditors or legal claims, as your SMSF assets are generally not accessible by anyone other than the members and beneficiaries.
However, using your SMSF to buy a commercial property for your business also involves some risks, such as:
- You may face liquidity issues if your SMSF does not have enough cash flow to cover the costs of owning and maintaining the property, especially if your business suffers a downturn or the property is vacant for a long period.
- You may incur higher fees and charges for setting up and running your SMSF, such as accounting, auditing, legal, and administration fees, which can reduce your returns and erode your retirement savings.
- You may limit your investment options and diversification, as your SMSF may have a large proportion of its assets tied up in one property, which can expose you to concentration risk and opportunity cost.
- You may breach the superannuation laws and regulations, such as the sole purpose test, the in-house asset rules, the borrowing rules, and the arm’s length rules, which can result in penalties, fines, or even the loss of your SMSF’s tax concessions.
How to set up and manage your SMSF for business purposes?
If you decide to use your SMSF to finance your business growth, you need to plan carefully and seek professional advice from a qualified financial planner, accountant, lawyer, or SMSF specialist. They can help you with the following steps:
- Establishing your SMSF: You need to register your SMSF with the Australian Taxation Office (ATO), obtain a trust deed, appoint a trustee, open a bank account, and create an investment strategy that suits your goals and risk appetite.
- Buying a commercial property: You need to find a suitable property that meets your business needs and SMSF objectives, arrange the finance, negotiate the price and terms, conduct due diligence, and complete the settlement.
- Leasing the property to your business: You need to sign a lease agreement with your business, set the rent and conditions, collect the rent payments, and review the lease periodically.
- Maintaining the property and your SMSF: You need to pay the ongoing costs of owning and managing the property, such as loan repayments, interest, taxes, insurance, and repairs, keep accurate records and reports, and ensure that your SMSF is audited annually by an approved auditor.
Using your SMSF to finance your business growth can be a rewarding strategy, but it also comes with challenges and responsibilities. You need to weigh the pros and cons, follow the rules and regulations, and seek professional guidance before making any decisions. By doing so, you can maximise the benefits and minimise the risks of using your SMSF for business purposes.
