SMSF Investment In Commercial Property Grows

The latest Australian Taxation Office (ATO) data showed significant growth in non-residential property assets held by self-managed superannuation funds (SMSFs), with a 9.1% increase between the September 2023 and 2024 quarters.

This trend highlights the growing popularity of commercial property as an investment choice for SMSFs. The increase also reflects a general shift towards alternative asset classes as investors look to diversify their portfolios.

Benefits of purchasing commercial property through your SMSF

1. Diversification. Purchasing a commercial property within your SMSF allows you to balance your portfolio with a mix of asset classes. Adding commercial property reduces your reliance on traditional investments like shares, which can be volatile. By including commercial real estate, SMSF trustees can spread risk and potentially improve returns overall.

2. Potential for higher returns. Commercial properties often generate higher yields compared to residential properties, between 6-8%, according to Rethink Group CEO Scott O’Neill. On the other hand, gross rental yields for residential property were around 3.7% in November, according to CoreLogic. These returns can be even more pronounced in prime locations or niche sectors, like data centres or medical centres, where demand is robust. This difference can lead to a more substantial income stream for your SMSF, contributing to faster growth of your retirement savings.

3. Tax advantages. Investing in commercial property through an SMSF can provide several tax advantages. First, rental income earned by your SMSF is taxed at a concessional rate of 15%, significantly lower than the marginal tax rates that apply to personal income. Second, capital gains tax on the sale of commercial property held within an SMSF for more than 12 months is reduced to 10%. These tax advantages allow SMSF members to maximise the financial benefits of their investment over time.

4. Potential for long-term stability. Commercial properties, particularly well-located ones, can provide you with strong tenant demand. This means greater stability and long-term growth potential compared to more volatile asset classes. The latest Financial Stability Review from the Reserve Bank of Australia found “there continues to be little evidence of financial stress among owners of Australian commercial real estate”. This highlights the resilience of commercial property investments, even during periods of economic uncertainty.

What to consider when buying commercial property with an SMSF

1. Sole purpose test. One of the key requirements for SMSF investment property is sticking to the sole purpose test. This means that all investments, including your commercial property, must be made solely for the purpose of providing retirement benefits to SMSF members. This means the property can’t be used for personal purposes or unrelated activities. For example, a trustee can’t buy a commercial property and allow a tenant to use it rent-free. Non-compliance with the sole purpose test can result in penalties from the ATO.

2. Renting to SMSF members. Unlike residential SMSF investment property, SMSFs can lease commercial property to related parties. This can include a member or their business. But, the rent must reflect market rates and the lease terms must align with standard commercial agreements. Many small business owners use this as a chance to purchase premises through their SMSF and lease it back to their business, creating a double benefit of securing a business location and growing their retirement savings. Renting your own SMSF property also means you have more control of your business’s premises, without any worry about unfair lease terms or sudden changes.

3. Limited-recourse borrowing arrangements (LRBAs). When taking out a mortgage through your SMSF, there is a risk that at some point your fund will be unable to cover the repayments. If that happens, the LRBA protects the other assets owned by your SMSF, because the only asset the lender can seize in a bid to recoup its money is the property. There are two other important points with LRBAs. First, the loan can be used only for the purchase of a single asset. Second, the loan can’t be used for the improvement of an asset (i.e. renovations), only the purchase.

Are you interested in buying property through your SMSF? Speak to Shore Financial about your finance options. Call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.