USING SUPER TO PURCHASE YOUR COMMERCIAL PROPERTY
For some of those in business, super does not have a great deal of appeal, as
they wish to build their business as their way to securing their future.
Building any business is largely about managing cashflow, and with company tax,
GST, and super drawing cash away from the business it is hardly surprising that
many business people wish only to pay the minimum amount required.
Compounding this problem, is that the investment returns most super funds
have traditionally provided has been relatively poor next to the possible
returns the business could have achieved, by using the proceeds for additional
marketing, advertising, reduced overdraft interest paid, and in capitalising
into business infrastructure.
This thinking is hard to fault.
However, a strategy that business people may find appealing, is the idea of
utilising existing superannuation benefits and future contributions to super to
purchase a commercial premises, which could be possibly the one you either
currently own or lease.
It works like this:
Michael Smart is a 45 year old who owns a successful corner store through his
family company, he is currently owns the premises worth $600,000 and is paying
off the loan of $300,000.
Michael and his wife Julie own their house worth $500,000 outright, and the
couple have a combined super of $120,000.
Michael would like to be able to expand his business but is hampered by is
hampered by existing debt. He would like to be able to use his super assets to
reduce that debt. He believes that the shop premises if held in the super fund
would provide good long term growth and a stable rental income.
They decide to sell the shop premises to a private unit trust (which they
control) in which the super fund invests its $120,000 and makes a contribution
to super of an additional $180,000 which will also be invested in the unit
trust. This makes the super fund investment a total of $300,000. Michael then
refinances the balance of $300,000 to be secured against his own house, and the
refinanced monies are then invested in the private unit trust.
To clarify what has occurred, Michael and Julie have essentially pooled
together their super with their personal investment, via a unit trust, to
purchase the property, without the super fund borrowing.
Note: the unit trust now has NO DEBT OR BORROWINGS and ALL transactions MUST
be conducted at market value.
Michael now has a negatively geared investment. He has borrowed monies for an
investment purpose ie invest in the unit trust, and will be entitled to a
distribution on the net rental share on the property generates, as well as any
Michael’s business now has an additional $120,000 in cashflow, and no debt on
the business property.
Note: If Michael has his overdraft secured against the “old” business
premises he would need to renegotiate this and move the security to his own
house. It is very important that no form of encumbrance, charge, lien is allowed
to exist on the “old” business premises.
Now if Michael decided that he wanted to increase his superannuation
contributions in the future, he could use these additional contributions to
purchase additional units in the unit trust. As always this must be done on an
arms length basis, and there may be capital gains tax and stamp duty
implications to resolve.
However, if over the course of the coming years Michael & Julie contribute
additional amounts to super, they may be able to purchase the remaining units in
the trust so that their superannuation fund owns 100% of the unit trust.
This can provide significant tax savings!
For example, if the business premises improved in market value so that by the
time Michael and Julie decide to retire at age 60 years, the property which the
fund had been investing in for 15 years, doubled in value the property would be
worth $1,200,000. If they sold after they had retired would pay NO TAX on a
capital gain of $600,000.
This $1,200,000 investment would also provide a combined allocated pension of
between $67,420 and $133,340 per annum
What you CAN do?
- You can rent it from yourself at independent market value
- You can run your business from these premises
- The super fund can purchase the property from you at market value
What you CANNOT do?
- Purchase the property on a non arms length basis
- Rent the property on a non arms length basis
- Have any encumbrance, debt, lien, charge etc… over the business premises.
Whilst this strategy may be appealing to many people a number of issues need
to be addressed and planned for, and this strategy may not be as appealing when
looked at when your personal circumstances are taken into account.
Such issues may include but not limited to:
- Capital Gains tax consequences
- Mandatory cashing/pension obligations
- Time to retirement
- Minimum pension requirements
- Reasonable Benefit Limit issues
- Balance of member accounts
- Liquidity of fund assets
- Investment strategy consequences
- Make up of current benefits
- Future fund earnings
This example is not designed to provide advice, and is merely an example of
one possible outcome. Your personal circumstances must be taken into account
prior to making any decision. We strongly recommend that you seek advice from a
specialist licensed financial adviser prior to making any decision.
No investment advice provided to you. This web site is not designed for the purpose of providing personal financial
or investment advice. Information provided does not take into account your
particular investment objectives, financial situation or investment needs. You should assess whether the information on this web site is appropriate to
your particular investment objectives, financial situation and investment needs.
You should do this before making an investment decision on the basis of the
information on this web site. You can either make this assessment yourself or
seek the assistance of any adviser.
To find out more
and to apply online to see if a Self Managed Super Fund suits you, click here.