These days, many small-business owners choose to buy their business premises through their SMSF. But how can you maximise incentives to achieve the best investment outcome?
Since the rules were amended in 2007 allowing SMSFs to borrow funds to buy property, many small-business owners have arranged for their self-managed super fund to buy their business premises using SMSF loans. This way, one of their greatest assets is held within the tax-effective structure of SMSFs.
To make the most of this investment strategy, consider the following:
This is most effective as a long-term strategy. Once a property has been held for more than 12 months, rents are taxed at only 15 per cent within the fund and capital gains are taxed at only 10 per cent. The full tax incentives don’t kick in until the fund has transferred into pension phase when fund income and capital gains become completely tax-free.
Consider flexible lending options. The problem with Limited Recourse Borrowing Arrangements (LRBAs) is the ultra conservative nature of some of the SMSF lenders, including restrictions on the types of properties you can buy. If you have other assets, you might like to consider related party lending, which allows your SMSFs to borrow money from you instead of a bank. So you become the lender for your SMSF. For example, you borrow against your home to lend to your SMSF, you make the required repayments to the bank and your SMSF forwards repayments to you. The benefit here is that related party lending doesn’t limit the type of property you can buy, you have access to a greater choice of lenders and you avoid expensive legal costs. The downside of this type of lending? A lower maximum borrowing capacity of 70 per cent and you lose access to the cash or equity that’s been loaned to your SMSF.
Make sure you claim all tax incentives available to you. SMSFs can claim the same types of tax deductions as typical property investors including negative-gearing deductions such as interest payments and rental income. Expenses such as accounting fees, insurance (including life insurance), equipment, subscriptions and seminars can also be claimed so long as they’re related to the running of the SMSF and receipts are in the name of the SMSF.
Always take specialist advice about the appropriate lending structure for your SMSF. Few professionals fully understand all that’s involved with this specialised area and getting the right setup and loan structure for your individual situation is vital to your investment outcome.