One of the simplest but most effective strategies for a business owner to save money is often overlooked and regrettably not always utilised to its full potential. This strategy provides tax benefits, allows capital to accumulate over time and offers business owners the opportunity to pay themselves rather than third parties. All with the added bonus of creating a plan for retirement, something that so many business owners don’t prioritise. It’s the crème de la crème of the small business world. The strategy: renting your business premises from your self-managed superannuation fund (SMSF).
Benefits of a business premises in a SMSF
Owning a business premises in a SMSF provides a plethora of benefits. One such benefit is tax savings by paying rent from the business into the SMSF. The business is then able to claim a tax deduction, potentially saving 30%-45% tax (depending on the business structure). The SMSF declares income and pays 15% tax on that income (or even 0% if the SMSF is in pension mode). The tax savings also apply when considering selling the premises and any capital gains that arise from the sale.
Another benefit of owning the business premises in a SMSF is asset protection. As the SMSF is a separate structure and regulated by its own set of laws, the premises has a solid chance of being protected from creditors and should be considered with other asset protection strategies. However, these strategies are not always iron clad and should be discussed at length with the appropriate advisor.
This strategy also provides more flexibility when trying to put more money into super. Rent can be used as a means to accumulate more funds for retirement and the best thing is rental income does not count towards the contributions caps. This means more money can be injected from the individual member’s hands into their SMSF, resulting in a larger funds pool for retirement.
So, how do you get the premise into a SMSF?
Well, herein potentially lies additional benefits from implementing this strategy. Don’t have enough capital to purchase the premises through your own means? Your SMSF might have enough funds to purchase it instead. If financially sound to do so, a SMSF could even obtain financing through a limited recourse borrowing arrangement to secure the premises.
Own the premises but desire a more effective way of saving tax and better funding for retirement? Contribute the premises into a SMSF as an in-specie (non-cash) contribution and watch your retirement savings grow (keeping in mind the contribution cannot exceed the caps). Small business tax concessions could apply to ease the burden of moving the premises into super.
A combination of the above may also better suit individual needs. As long as the premises is real property, it can be contributed into or purchased by a SMSF, without contravening the SMSF rules. Buying through a SMSF using retirement funds could be a useful way of owning an asset that cannot be purchased through other means. All while ensuring rent paid by your business goes to fund your own retirement rather than a third party.
Timing and planning is crucial when implementing this strategy as there are many considerations and one size does not fit all. There are also some disadvantages to owning a business premises in a SMSF, such as; increased administration and compliance costs, locking funds and assets up until retirement, and potentially severe consequences for deliberate non-compliance.