Trust setups to purchase commercial property
Establishing a self-managed super fund has several benefits, one of which is the freedom to make investments how you see fit. Property is a part of this for some.
It’s critical that you are aware of all the requirements if you’re considering purchasing commercial property using your SMSF.
Advantages of buying a commercial property
The following are some clear benefits of purchasing commercial property through
your SMSF:
- It is a tax-effective choice due to the 15% superannuation income tax rate.
Why Paying your own rent instead of a landlord will help your SMSF grow faster.
- A shrewd method of disposing of your possessions. You may, for instance, hold your commercial space in the name of your SMSF and lease it to your company. After that, more on this.
- Better asset protection because your company is a different legal entity from your SMSF.
- As your SMSF is the owner of your property, you have a secure tenancy.
Who should think about investing in commercial real estate through their SMSF?
Business owners and medical professionals who own their own clinic are two distinct groups that will profit from this tactic.
- Company owners
As we’ve previously discussed, business owners can benefit greatly from SMSFs. This structure’s adaptability enables you to use your SMSF to buy real estate for your business.
As an example:
- You buy a place of business. You take out a loan from your SMSF and use the proceeds to purchase the business in your SMSF’s name. This property is currently owned by your SMSF.
- Now that your SMSF is the owner of the property, it rents the space to your company. The rent is then paid by your business to your SMSF, and this rent can be deducted from your firm’s income.
In other words, your SMSF is utilizing your rent to pay down the debt, and your rent is directly deposited into your SMSF as income.
- Medical professionals
Medical practitioners, especially doctors and dentists, frequently purchase medical facilities as part of their business plans.
Each doctor who works in a hospital or other medical setting with other doctors will probably have a sizeable sum in their super. This enables them to diversify their mega assets into commercial real estate.
For example:
- A medical practice employs three doctors in tandem. A 30% service charge is paid by each party to support office overhead costs such rent and facilities for the reception and offices.
- A chance to buy the space they’re using presents itself. The doctors choose to create a unit trust after speaking with their accountant and financial consultant. To purchase the property, this unit trust takes out a loan.
- Every doctor has an SMSF, and every SMSF owns 33.3% of the units in the unit trust. The unit trust, from which their monthly 30% service charge is allocated to their SMSFs, receives the funds that are paid by them as a deposit.
They each then get a tax deduction for their medical practices, and the rental income in their SMSF is subject to the 15% marginal tax rate.
How your SMSF works when purchasing commercial property?
To enter the SMSF property market, there are a number of measures to take.
- Make sure you have the appropriate balance before buying a commercial property. If you’re purchasing the home altogether, you’ll need the entire cash amount in your SMSF in addition to the roughly 5% stamp duty.
- You should plan to have a deposit of between 30% and 40%, plus stamp duty, if you’re borrowing to buy a commercial property. Additional funds will be required to pay for continuing costs such as rates, strata fees, and insurance as well as legal expenditures..
- A limited recourse borrowing arrangement must be used if you are borrowing money to purchase a business property (LRBA). For SMSF members, this is advantageous since it shields their SMSF assets from their lender in the event that the property loan defaults.
- In order to create an LRBA, you must first create a bare trust within your SMSF. This effectively creates a separate trust within your SMSF for the purpose of separating the commercial property investment from other assets.
- Choose the house you want to buy and make sure you can truly afford it, either through a loan or a cash payment. Make sure you enter your SMSF’s name on the contract when you are successful in purchasing the property.
- Create a commercial leasing agreement to formalize your relationship. The good news about commercial real estate is that you are free to lease it to anybody you choose, provided the lease is executed at market prices. This also applies to your own company.Congratulations! You’re now leasing a commercial property via your SMSF.
But keep in mind that you must still follow the requirements every year. You must continue to ensure that your SMSF is compliant and that the correct amount of rent I paid on time each financial year.
Additional things to think about when purchasing commercial property through an SMSF
· Improving your home
· Buying the property under the proper name
· Being aware of one-time acquiring assets
· Recognize fees and charges
· SMSF contributions
Frequently Asked Questions
Why use a trust to purchase commercial property instead of buying personally?
A trust can offer asset protection benefits, flexibility in distributing rental income among beneficiaries, and potential estate planning advantages. Whether it’s the right choice depends on your circumstances, so we weigh the benefits against the extra setup and compliance cost before recommending it.
What type of trust is best for buying commercial property?
Discretionary (family) trusts and unit trusts are both commonly used, each with different implications for control, income distribution and how additional investors can be brought in. We help you choose based on who’s involved and how you want income and any future sale proceeds to be distributed.
Can a trust borrow to purchase commercial property?
Yes – trusts can generally borrow to purchase property, though lenders may have specific requirements around the trust deed and trustee structure, and personal guarantees are often required. We work with your broker or lender to make sure the trust structure meets their lending criteria.
What are the ongoing costs of running a trust that owns commercial property?
Ongoing costs include annual accounting and tax return preparation, trustee company compliance if a corporate trustee is used, and any state-based land tax that may apply at trust rates rather than individual rates. We factor these into the overall cost comparison before you commit to a structure.
Can I set up a trust and transfer an existing property into it later?
You can, but transferring an already-owned property into a trust generally triggers stamp duty and capital gains tax as if it were a sale, so it’s usually far more cost-effective to set the trust up correctly before the purchase rather than restructure afterwards.
How much does it cost to set up a trust for a commercial property purchase?
Costs depend on the type of trust, whether a corporate trustee is required, and your state’s registration fees. We provide a fixed quote covering the trust deed, ABN/TFN registration and any corporate trustee setup before you proceed.
Related Trust & Structuring Services
See our unit trust formation and unit trust pages for more detail on that structure specifically, or company formation if a corporate structure suits your purchase better.
How to set up a trust for a commercial property purchase, the trust setup cost, and the pros and cons of using a trust for this kind of purchase all depend on who’s involved and how you plan to hold the property – we walk through each before you commit to a structure.