SMSF Commercial Property | How to Invest in Commercial Real Estate with Your SMSF

SMSF

Understanding SMSF Commercial Property Rules and Compliance

Investing in commercial property with your SMSF (Self-Managed Super Fund) can offer significant benefits, including greater control over your retirement savings and diversification opportunities. This guide will help you understand the rules, compliance requirements, and strategies for successfully managing commercial real estate within your SMSF. 

What can I invest in and who can invest?

You can invest as an individual or as an owner occupied SMSF investor to purchase a commercial CBD office suite, for medical practices, small businesses, legal practices or a farm or a warehouse style property.

  • Review Your SMSF Investment Strategy: Make sure your strategy allows for commercial property investment.

  • Obtain Professional Advice: Consult with financial advisors or SMSF specialists to ensure compliance.

  • Find SMSF Compliant Commercial Property: Look for commercial properties that align with your investment goals and SMSF guidelines.

  • Structure Your SMSF Loan Correctly:

    • Limited Recourse Borrowing Arrangement (LRBA): Consider this structure if borrowing is required.
    • Finance Pre-Approval: Get pre-approved for your SMSF loan to streamline the process.
  • Conduct Due Diligence: Research the property thoroughly, including its location, potential rental returns, and legal obligations.

  • Complete the Purchase: Finalize the property purchase in the name of the SMSF and ensure it is reflected correctly in the fund’s records.

Typically, where bank and non bank lending is concerned, the type of business real property, lenders will lend to, will determine the following factors:

For more information go to the ATO SMSF Business Property Page

Can my SMSF Purchase my existing
business premises & rent it out?

This would have to be the most popular form of SMSF commercial property purchase, due to the higher commercial rental returns and the retirement and business benefits gained from purchasing an owner occupied business property. Business Real Property is the only exception to the ATO rules for transferring property assets into an SMSF.

SMSF Commercial Property
It is also a highly beneficial strategy for owner occupied business owners for the following reasons:

Issues with this strategy

It is very important that your SMSF commercial property is purchased at market value and that you rent the property at a market rental rate which is neither over market rates or under, so that you do not provide a benefit to your SMSF by charging it less for rent or by paying more rent to contribute more into super. You will need to ensure that you have a legal and enforceable lease is in place, you will need to document this arrangement as well.

Failure to do any of the above will render your fund non ­ compliant by the ATO, resulting in penalty tax of 47% and fines and further action. One final point to consider is the risk of investing all of your super retirement savings in one asset (referred to as: concentration risk) and the very real risk of commercial property falling in value. In fact, such is the concern of falling commercial property values, that all bank lenders require regular valuations of commercial property to manage their risks.

There are other considerations when transferring business property to an SMSF, such as capital gains tax and stamp duty costs and the viability of this strategy based on the super funds trust deed and investment strategy. The good news is there are further  retirement tax exemptions for business owners who want to own business property in an SMSF. It is important that the funds investment strategy is updated to reflect these arrangements. Remember, to always, seek financial and tax advice with property in super strategies.

Further Reading

Services Fees

Tips :SMSF commercial lending takes double the time of residential lending so an extended settlement might be required.

Check out our SMSF Loans page

SMSF Commercial Property FAQs

Q1: Can I lease my SMSF commercial property to my own business? A: Yes, leasing your SMSF commercial property to your business is allowed under strict compliance with the in-house asset and arm’s length transaction rules.

Q2: Are there borrowing restrictions for SMSF commercial property? A: Yes, SMSFs must use a Limited Recourse Borrowing Arrangement (LRBA) when borrowing to invest in commercial property.

Q3: What are the risks of investing in commercial property with an SMSF? A: Risks include market volatility, liquidity issues, and potential non-compliance with ATO rules.

 Risks and Considerations of SMSF Commercial Real Estate Investment

Investing in commercial property through your SMSF can be lucrative, but it’s crucial to be aware of potential risks:

  • Liquidity Issues: Commercial property is not as liquid as other investment types, making it difficult to sell quickly.
  • Market Volatility: Commercial real estate prices can fluctuate significantly, affecting the property value.
  • Compliance Risks: Non-compliance with ATO rules can result in significant penalties and tax implications.

Conclusion 

Investing in commercial property with your SMSF can provide significant retirement benefits if done correctly. Ensure you follow the compliance guidelines, seek professional advice, and implement a solid investment strategy