Eight considerations before renting from your SMSF

Yesterday we looked at some of the benefits – and drawbacks – of renting your family business premises from your self-managed super fund. It is a common arrangement, but you should make sure you are protected.

Here are eight key points to consider before a family business decides to rent its premises from the family’s SMSF:

1. Think about what could go wrong before entering the arrangement.

There would be a natural tendency to concentrate on the positives, but plenty of other problems could arise apart from the family business being unable to pay its rent.

Peter Bobbin, a principal of Argyle Lawyers, emphasises that the SMSF might be forced to sell the premises to pay benefits to members following a marriage break-up, death or disability. Indeed, the marriage of a couple who are both business partners and SMSF members might end in divorce.

In turn, the forced sale of the premises to pay member benefits may damage the family business.

2. Don’t let possible tax advantages dominate your decision-making: “Understand the commercial and legal risks,” advises Bobbin, who describes tax-dominated decisions as “misguided”. Bobbin’s specialties include SMSFs, tax and family businesses.

3. Understand the fund’s obligations to pursue unpaid rent – even from its members’ own business.

 “A fund super fund must use all usual means to collected unpaid rent,” Bobbin says, “and commonly should have personal guarantees for any arrangement with a business.

“If the business fails, the fund will need to press the personal guarantees – even with the members themselves.”

4. Recognise what actions the SMSF regulator could take concerning unpaid rent by the fund members’ business:

Martin Murden, a director of Partners Group, financial services provider to accountants, says possible actions for breaching the Superannuation Industry (Supervision) Act include fines, the trustees being disqualified or the fund being declared non-complying.

The market value of non-complying funds is taxed at the top marginal rate, less any non-concessional or undeducted contributions. In short, this can wipe out almost half a fund’s assets.

5. Understand your fund could lose ownership of geared property.

Murden says that if your business can’t pay rent to your SMSF, your fund could fail to make instalments on its investment loan. “If your fund can’t meet its loan instalments, the bank will want its money back [plus its costs].”

And Murden says the fund could lose its investment and the family business could lose the use of its premises.

6. Question whether your SMSF can really afford to gear a commercial property – no matter whether your own business will become the tenant. 

Murden says funds should take into account the levels of debt already being carried by the SMSF, the business and the business owners in a personal capacity.

He suggests that funds should consider the effect that the next halving of the standard cap on concessional contributions for super fund members over 50 could have on their fund’s cash flow and ability to make loan repayments. (This cap will fall to an indexed $25,000 from July next year.) Many funds require the cash flow from high concessional contributions to meet all of their loan obligations.

Funds should also assess how impact of future interest rate rises on the ability to make loan repayments, Murden says.

7. Decide whether your business may be better off renting its business premises from an unrelated landlord.

Murden says funds shouldn’t rent business premises to their own businesses simply because it is allowed under superannuation law.

Some SMSFs would be tougher with an unrelated tenant than a related one. And that approach may not be in the fund members’ best interests.

8. Ensure your fund is adequately diversified if possible.

 This will mean that the fund members’ savings are not overly dependent on the profitability of a single costly asset, name your business premises.