Commercial Property and your SMSF
Posted on 24th October 2016 by Christabelle Harris
A Self Managed Superannuation Fund (SMSF) can hold both commercial and residential property, whether via direct ownership or through a limited recourse borrowing arrangement. A SMSF can also acquire Business Real Property from a related party when acquired at market value. Nominal Stamp Duty can apply to the transfer.
In addition, if the property satisfies the definition of Business Real Property, the tenant can be a related party of the SMSF. For example, a small business owner may purchase a commercial property through their SMSF and then have the superfund lease the property back to the business which is run by the members of the SMSF.
This article focuses on related party commercial lease arrangements and satisfying the Superannuation Industry (Supervision) Act 1993 (SISA) regulations to maintain a complying SMSF.
Business Real Property
If the members / trustees of a SMSF want to own commercial property within their SMSF and lease it back to a business that is a related party of the superfund, the property must comply with the definition of “Business Real Property” (BRP) under the SIS Act.
To comply with the definition of a BRP under the SIS Act, the SMSF must hold an eligible interest in the property and the property must comply with the business use test, which requires the property to be used wholly and exclusively in the running of a business.
Should the property not fall within the definition of BRP under the SIS Act, then it will be considered to be an in house asset and will be subject to the 5% cap rule relating to in house assets.
For compliance purposes it is essential that when BRP is leased by a SMSF to a related party, the Trustee of the superfund treats the lease transaction as if it was dealing with a third party tenant i.e. commercial arm’s length terms. This includes enforcing all lease obligations such as rent amounts, outgoings payable, rent reviews etc.
In order to demonstrate the lease is on a commercial and arm’s length basis, the SMSF should hold a formal lease between it and the tenant. The terms of the lease should also be independently verified. The trustees can source this information through a real estate agent working in the property area, property valuer or obtain supporting benchmarking evidence themselves.
A lease is a legally binding agreement between a landlord and a tenant that creates an interest in the property that is subject to the lease. In order for the interest in the property to be binding the agreement needs to be documented in writing. This means that a “hand shake” deal or verbal agreement to lease a property will not be binding – it must be in writing.
In summary, when an SMSF holds commercial property and leases it to a related party, it should:
1. have the investment contained in its investment strategy;
2. make sure that the property falls within the definition of a BRP under the SIS Act;
3. have a written commercial lease agreement in place – on commercial terms; and
4. ensure that the terms of the lease are complied with at all times.
Disclaimer: The content of this Article is general information only. GeersSullivan recommends you seek professional advice before taking any action based on the content of this Article. Please contact our Superannuation Manager Helen Cooper on (08) 9316 7000 should you wish to discuss your specific circumstances in more detail.