More business owners holding premises through DIY super
Tax and superannuation lawyer Robert Richards is among a growing group of professionals and business owners to hold their business premises in their self-managed super funds.
His legal practice pays his SMSF a commercial rent for use of its small strata-title office on the top floor off a 1930s office block, overlooking
The property is ungeared, having been bought before amendments to superannuation law four years ago unequivocally allowed SMSFs to gear property and other investments under strict conditions.
Richards says his SMSF acquired the commercial property for the main purpose of increasing his retirement savings in a tax-efficient way. And there are the added benefits of having a centrally located office for a tax lawyer and not having to deal with an unrelated landlord.
Philip La Greca, technical services director for self-managed super fund administrator Multiport, says many more professionals and business owners are considering holding their business premises through their SMSFs.
La Greca attributes this growing interest in business property to SMSF trustees wanting to take more advantage of superannuation’s concessional tax treatment and asset-protection attributes. And, he says, more trustees are seeking an alternative to shares given the level of sharemarket volatility.
He points out that when business owners eventually retire, the trustees can decide whether to sell the business premises together with the business or to keep the premises in the fund to provide a retirement income.
The latest Multiport SMSF Investments Pattern Survey, conducted in late March, shows that a least 13% of the 1400 SMSFs administered by the firm are borrowing to invest using limited-recourse loans. (Multiport will publish an updated report over the next couple of weeks.)
The average property loan among Multiport client funds is $200,000, compared with $110,000 for shares and managed investments. And 56% of the loans taken by these SMSFs are invested in property.
La Greca describes the average $200,000 property loan as conservative, considering that the SMSFs administered by Multiport have an average asset value of almost $900,000.
“The funds are dipping their toes [into borrowing for property], not making a head-long plunge,” he says.
La Greca agrees that interest among SMSFs in borrowing to invest under the borrowing provisions introduced four years ago was relatively low until early this year. But he says that interest has since accelerated.
SMSF trustees were gaining more of an understanding about the borrowing rules. And financial institutions were becoming more comfortable about lending to SMSFs despite the requirement in superannuation law for the use of limited recourse loans.
As discussed in Property Observer’s latest e-book, 16 questions SMSF trustees should ask before investing in property, geared assets in self-managed funds must be held in trust until payment of the final loan instalment. And lenders cannot make a claim against any other assets of the super fund, apart from the geared asset, in the event of a default on the loan.
La Greca says about four SMSFs a month – among those administered by Multiport – are entering new gearing arrangements, up from about one a month last year.
“And there is no question that the prime asset for SMSF gearing is real estate,” La Greca adds.
