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A step-by-step guide for using your Self-Managed Super Fund (SMSF) to purchase commercial property

As a specialised commercial finance brokerage, we receive enquiries regularly from existing and new clients wanting to secure finance utilising their SMSF. It’s a right royal hot topic at the minute!

Last month’s article, ‘Pros vs Cons: Using a Self-Managed Super Fund (SMSF) to purchase commercial property’, aimed to provide an insight into the potential advantages and disadvantages.

I’ll be straight up with you, is the process easy? NO. Is borrowing funds via your SMSF a good idea? That is completely dependent on your individual business situation and goals – it could very well be, but you need to be sure you have a full range of options to consider, which is where SMSF specialists (in a variety of fields) will be invaluable.

When it comes to securing successful finance it’s important to note that while there are some lenders who are receptive to lending for SMSF, there are many that just don’t do it. 

Each bank or lender will also have different lending criteria (for example some may only lend for owner occupier purposes, others will lend to investors). Additionally, it’s fair to say you could be looking at an additional 1 -1.5% in costs over a traditional loan. Yes, there are tax concessions but again, you need to weigh these up carefully.

The Process

Once you’ve spoken to your accountant and/or financial advisor and are confident the advantages outweigh the disadvantages based on your situation, the following steps will need to follow:

• Establish an SMSF: Firstly, individuals need to set up an SMSF by creating a trust deed, appointing trustees, and obtaining a tax file number (TFN) and an Australian Business Number (ABN) for the fund. It is essential to adhere to the legal and regulatory requirements imposed by the Australian Taxation Office (ATO).
• Develop an Investment Strategy: A thorough investment strategy for the SMSF must be outlined, considering factors such as risk tolerance, expected returns, and diversification. The investment strategy should explicitly state the intention to invest in commercial property. It’s important to note that when lending against your SMSF most banks will require confirmation from your accountant or financial advisor as to the validity of the proposal.
• Ensure Sufficient Funds: To purchase commercial property, the SMSF needs to have adequate funds available. A rule of thumb is $100k minimum balance but in most cases, you’ll need much more when considering the additional associated costs of set up and compliance. When borrowing against the SMSF the required minimum deposit required will differ by lender and can range from 20 – 35%. Trustees should assess the financial capability of the fund to cover the property acquisition costs, ongoing expenses, and potential loan repayments if borrowing is involved.
• Compliance with Superannuation Rules: Trustees must ensure compliance with the superannuation laws and regulations, including the Sole Purpose Test. The acquisition of commercial property should primarily be for the purpose of providing retirement benefits to the SMSF members.
• Review Borrowing Options with your Finance Broker: SMSFs can borrow funds to finance the purchase of commercial property, subject to specific borrowing rules. This is commonly known as a Limited Recourse Borrowing Arrangement (LRBA), which limits the lender’s rights to the purchased property only, minimising risk to other SMSF assets.
• Property Selection and Due Diligence: The trustees should identify and research suitable commercial properties that align with the SMSF’s investment strategy. Conducting thorough due diligence is crucial, including property inspections, evaluating potential rental income, analysing market trends, and seeking professional advice when necessary.
• Structure the Purchase: The SMSF, acting as the buyer, will enter into a contract of sale for the commercial property. The property will be held in the name of the SMSF with the trustees listed as the legal owners.
• Financing and Settlement: Your finance broker will assist you to complete and package your loan application for the selected lender. The borrowing must comply with the ATO’s guidelines for limited recourse borrowing (LRB). Once the loan is approved, the settlement process takes place, and the property ownership is transferred to the SMSF. An experienced SMSF finance broker will be in the best position to guide you through the loan process and additional loan documentation needs.
• Ongoing Management and Compliance: The trustees are responsible for managing the commercial property held within the SMSF. This includes handling property maintenance, collecting rental income, paying expenses, and ensuring ongoing compliance with superannuation and taxation regulations.

Investing in commercial property through an SMSF requires careful consideration, understanding of the associated risks, and compliance with legal requirements. 

Seeking advice from experienced SMSF professionals such as accountants, financial and tax advisors is paramount to ensure compliance and optimise investment outcomes. Should you require the assistance of proven professionals in these fields please touch base and I’m happy to provide trusted recommendations.

Would you like to know more?

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