THE HIGHER RENTAL RETURNS of commercial property make it more attractive to investors, especially those who are planning for their retirement. They often buy and hold commercial properties in their SMSF for a better tax environment.
During the accumulation phase, earnings or rental income are taxed at 15% – while CGT only comes at 10% for properties which are held for over 12 months.
Whereas, in the pension phase, you pay no tax on assets that fund the pension – except if they exceed the $1.6 million cap.
How to go about things
Typically, investors buy their own commercial property (or business real property), hold it in their SMSF and lease it for a small amount. This practice is common in the sub-$500,000 market and for professionals who buy commercial properties through a self-managed super fund – thereby, allowing them to grow their SMSF funds – instead of paying rent to a landlord.
SMSF investors can buy a leased commercial property like any other investor; but for residential properties, they need a minimum amount of $500,000 to $600,000.
Sometimes people find it difficult to buy commercial properties – given the sums are often larger. And there are some risks as well – because of the lack of liquidity and diversification, especially if you are saving for retirement.
The Tax implications
There could also be tax implications for properties that perform well in retirement. The maximum balance that can fund a tax-free income stream or pension payment from super will soon be $1.6 million. If it exceeds, it will be converted back to accumulation phase and will be taxed at 15%.
Property can be purchased right away, if the SMSF has the funds to get a loan and buy it despite the current tight borrowing policies.
Lending rules are stricter than when you borrow in your personal capacity – because the required deposit is larger, with an LVR at about 65%.
If an SMSF member borrows to acquire a commercial property, the funds can be used to repair or maintain the property, but not make improvements. CGT tax concessions and state-based exemptions for stamp duty should also be looked at by talking to your accountant.
Looking further ahead
Remember to have an exit plan for the property, when the time comes for retirement, and you need to be liquid.
Make sure the property will produce enough income, to serve as your income stream. And also determine whether or not buyers would want to buy it; plus whether it is likely have a good market to sell or rent the premises.
Bottom Line: Whether you are a beginner, seasoned investor or business owner, you probably need guidance to maximise the financial areas of your life. And we can give you an integrated and tailored solution of your superannuation, taxation, property investment, asset protection, estate planning and more.
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.