Purchasing commercial property through a Self-Managed Super Fund (SMSF) can be a strategic way to grow your retirement wealth—especially if you’re a business owner. But it’s not without rules and risks. Here’s a comprehensive look at the potential benefits and challenges.
Pros
1. Concessional tax on rental income
Rental income received by the SMSF is taxed at just 15% while the fund is in the accumulation phase. This is significantly lower than most individuals’ marginal tax rates, allowing more income to be retained within the fund and reinvested for retirement.
2. Reduced capital gains tax (CGT)
If the property is held for more than 12 months, any capital gain is eligible for a one-third discount, bringing the effective CGT rate down to 10% while the fund is in accumulation mode.
If the property is sold when the SMSF is in pension phase, no CGT may apply—effectively making the capital gain tax-free.
3. Asset protection
Assets held in an SMSF are generally protected from creditors, which can be particularly valuable for business owners or professionals at risk of litigation.
4. Lease your own business premises
An SMSF can buy commercial property and lease it back to your business, provided it’s done at market rates and properly documented. This lets your business pay rent to your own super fund rather than to an external landlord—helping to grow your retirement savings while maintaining control over your premises.
5. Stable, long-term income stream
Commercial property can provide a reliable rental income, which may be especially useful for funding pension payments in retirement.
6. Control and flexibility
An SMSF offers greater control over investment decisions compared to retail or industry super funds. You decide when to buy or sell, and how the property is managed—within compliance rules.
7. Capital growth within a tax-effective environment
Any long-term capital appreciation occurs within the concessional tax environment of the SMSF, allowing you to grow wealth more efficiently than holding the property in your own name or through a company or trust.
Cons
1. Limited access to funds
Superannuation is a long-term investment. You can’t access the property or its income for personal benefit until you meet a condition of release such as retirement.
2. Compliance obligations
The SMSF must comply with superannuation laws, including the sole purpose test, and ensure related-party leases are on commercial terms. Breaches can result in penalties or disqualification of the fund.
3. Liquidity issues
Property is illiquid. The fund must still meet obligations such as paying member benefits or pensions, which can be difficult if most of the fund’s value is tied up in real estate.
4. Borrowing complexities
If the SMSF borrows to purchase the property, it must use a Limited Recourse Borrowing Arrangement (LRBA).
5. Lack of diversification
A large property purchase can dominate the fund’s portfolio, exposing it to concentration risk and reducing exposure to other asset classes like shares or fixed income.
6. Potential complications with multiple members
If there’s a dispute between members—or if one member wants to exit the fund—the property may need to be sold. This can create cash flow pressure or force a sale at an inopportune time.
Important Reminder
While buying commercial property through your SMSF can deliver significant tax and financial benefits, it’s not suitable for everyone. You must ensure the investment strategy aligns with your fund’s objectives, liquidity needs, and long-term plans.
Always seek advice from a licensed financial adviser and SMSF specialist before proceeding. This is a complex area of superannuation law, and proper structuring is essential to avoid compliance issues and unintended tax consequences.
For more information visit ATO website
