SMSF investment: Buying commercial property, and borrowing options

Q: My wife and I purchased a licensed post office and freehold from Australia Post in the 1990s. In addition to the licence, we acquired one title with one building (part is leased to a commercial tenant and part we use to run the post office. A freestanding shop was added in 2000. The value of property is now about $1.25 million ($600,000 mortgage) and $750,000 licence. In general terms, can the freehold be transferred/sold to a SMSF in our names, assuming the bank will loan for such a transaction? Thanks for this great web site.

Trish’s response: Many thanks for your kind feedback on our website. For ease of explanation, I have divided your question into two parts.

• Can a SMSF buy a commercial property owned by SMSF members?
• Can a SMSF borrow to finance a property transaction?

Can a SMSF buy a commercial property owned by SMSF members?

‘Business real property’, such as commercial or industrial property, or a shop, or even a farm, can be a legitimate SMSF investment in the same way that residential property can be. In terms of superannuation investments, the key difference is that, unlike residential property, a SMSF can buy business real property from fund members, and fund members (or relatives of fund members) can use that asset if they choose to do so. Any lease in place must be at market rent and in line with the terms and conditions of a typical commercial lease.

Business real property can also be transferred as an in specie (non-cash) contribution, subject to contributions caps, and any small business retirement exemptions available (if applicable).

Any capital gains tax payable on the transfer is a tax bill for the individuals who originally owned the asset rather than the SMSF, although, with tax advice, there may be opportunities to reduce or eliminate that tax.

In some states, stamp duty will be payable on such a transaction. You need to check with your State Revenue Office whether stamp duty is applicable.

Note: Any property a SMSF purchases must be in the name of the SMSF (if corporate trustee), or the name of the individuals ‘as trustees’ of the SMSF. If the relevant state laws don’t permit property to be held by individuals ‘as trustees’ then the SMSF must ensure a declaration of trust is made or other type of legal instrument is in place to recognise the SMSF’s interest in the property.

Important: My response relates only to business real property, not to the post office licence.

Can a SMSF borrow to finance a property transaction?

A SMSF cannot directly borrow to finance a property transaction but the rules have been relaxed somewhat to permit an indirect form of borrowing via a limited recourse borrowing arrangement.

A limited recourse borrowing arrangement involves a SMSF entering a contract to pay instalments for an underlying asset. The borrowing within the geared product is used to buy the asset which is held on trust by the loan provider. The SMSF trustees receive the beneficial interest and a right to purchase the underlying asset. You cannot secure any other fund assets to finance the purchase.

The original loan against the prospective SMSF property, which is held in the names of the fund members, must be cleared before the SMSF purchases the property. Invariably, the repayment of the original loan happens on settlement/transfer, but be watchful that any bank offering the limited recourse product doesn’t confuse the fund’s ownership and loan liability with individual liability and ownership.

I explain the limited recourse borrowing arrangements in more detail in other articles on the SuperGuide website. You can check out the latest ATO views by clicking on the link below:

• Limited recourse borrowing arrangements by self-managed super funds – questions and answers