Many small businesses utilise their self-managed superannuation fund (SMSF) as part of their business planning and business structure. Usually, by having the SMSF own the premises from which the business operates.
The benefit of this is two-fold: the business has a security of tenancy which can be important for business success, and the business owners are ensuring that they are putting some money away to provide for their retirement.
It is important that if your SMSF is leasing business premises to your business, that the transactions are undertaken on an arm’s-length basis. The key features of any commercial lease should include:
A binding written lease agreement (signed by both parties)
A market rate of rental paid to the SMSF
Regular (monthly) payment of rent to the SMSF
Regular rental reviews
Clear documentation for changes to any arrangements or where rent is unable to be paid.
The key consideration for agreements between the business owner and the SMSF should be “what would be acceptable if the tenant was an unrelated party.” It is not appropriate to simply not pay rent for a period because the business is not doing well. This would not be acceptable if the tenant was not related to the SMSF, renegotiation on a commercial basis, however, may be appropriate. The Australian Taxation Office (ATO) has shown significant interest in these arrangements in recent years, focusing on whether or not the arrangement is on an arm’s length or commercial basis. Where the arrangement is not on an arm’s length basis, the ATO is able to deem that the income is “non-arm’s length income” and would then be subject to income tax at the highest marginal rate.
Since 2007, SMSFs have been able to borrow money to purchase assets, therefore enabling small businesses to viably own their own business premises. The rules around borrowing inside superannuation are quite strict and it is important that the correct structures are maintained and all the rules complied with.
While the legislative restrictions that apply to these borrowings can be quite complex, they do not include who the SMSF can borrow money from. It is possible for SMSF to borrow money from the member or a related party to complete an SMSF borrowing.
This area of superannuation law can be quite complex and business owners should always discuss these arrangements with their tax or business advisor and an adviser who specialises in SMSFs.
Shirley Schaefer, National Leader for Superannuation, BDO