The Australian Taxation Office’s statistical report from June 2012 indicates that 34.1 per cent of all new SMSF members and 15.6 per cent of all existing SMSF members are under the age of 45.
A key motivator for many SMSF establishments is the ability to have more control over where superannuation benefits are invested. An SMSF also provides members in retirement with flexible pension planning options.
One of the key attractions for younger SMSF members is the ability to own real property. Traditionally, this has not been a viable option for younger SMSF members, as it was necessary to have sufficient cash available to fund the purchase.
The introduction of the instalment warrant provisions in September 2007, followed by the limited recourse borrowing arrangement in July 2009, has allowed SMSF members to purchase property – including their business premises – with existing superannuation benefits, with the balance funded by borrowing in the SMSF.
Rules of attraction
The purchase of the property by the SMSF can be an effective long-term investment for members, with tax deductible rent being paid from the business entity and principal repayments on the loan potentially being made by deductible contributions.
If property investment is negatively geared in the early stages, the deductible interest can assist in offsetting the tax payable on deductible contributions to the fund. In the event of the property being sold, the capital gains tax is at a rate of 10 per cent, assuming it has been owned for more than 12 months.
If it is likely that the property will be held for a short period of time, the potential application of the small business capital gains tax concessions should be considered by owning the property somewhere other than within the SMSF.
As well as generating taxation advantages, the ownership of business premises can provide other advantages for the business owner. The risk of a dispute with their landlord is eliminated, as are the risks of the landlord not extending a lease or not allowing any improvements or alterations to be made to the property.
Risk considerations
As well as the advantages, younger members need to be mindful that there are also risks in using their SMSF to fund their borrowing.
The business entity is required to meet its lease obligations of making the rental payments, regardless of the current trading conditions for the business. If the servicing of the loan is dependent on contributions, a downturn in business may result in the bank wanting the loan repaid or the property sold.
There are also the life risks: what if the business owner cannot continue working due to ill-health or death? Clients should be advised to consider life, TPD, trauma and income protection insurances to mitigate these risks and reduce the chances of a forced asset sale, keeping in mind the potential for premiums to be paid by the SMSF.
