Q: My wife and I purchased a licensed post office and freehold from Australia Post 20 years ago. In addition to the licence, we acquired one title with one building (part of the building is leased to a commercial tenant and part we use to run the post office). A freestanding shop was added in 2002. The value of the property is now about $1.5 million ($600,000 mortgage) and then the $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?
A: For ease of explanation, I have divided your question into two parts.
- Can an SMSF buy a commercial property owned by SMSF members?
- Can an 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 SMSF 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 of the asset 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 personal tax bill.
Note: 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.
Important: Any property a SMSF purchases must be in the name of the SMSF (if corporate trustee), or in 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.
Disclaimer: My response is for information purposes only, and relates only to business real property, not to the post office licence. Anyone considering such a strategy should get professional advice.
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 (payments) 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 (via a holding trust). 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, although the loan provider can ask for a guarantee against personal assets.
Note: Using the scenario mentioned in the question as example, the original loan, which is currently against the prospective SMSF property, and is held in the names of the fund members in a personal capacity, 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 the SuperGuide article SMSF borrowing: Investing in property (what’s OK and NOT OK), and you can check out the latest ATO views by clicking on the link below:
For more information on property and super, see SuperGuide articles: