By Trevor Bransdon (Praescius Financial Consultants)
Would you like to own your business premises but not sure you have the capital to do so?
You may have the capital and not realise it. Let me explain how….
Recent changes to the Superannuation Act now allow self managed super funds (SMSF) to borrow to acquire assets, subject to certain conditions being met. The conditions of the arrangement are:
- The borrowing is limited recourse – the lender’s only security is the asset purchased, other SMSF assets cannot be used as security and lenders have no right to them in the case of defaults.
- The asset is an allowable asset for an SMSF to own.
- A third party (security trustee) holds legal title to the asset on trust for the SMSF. The SMSF has a beneficial interest and a right to call for a transfer of legal title when the loan is repaid and the mortgage discharged.
This means that business owners can potentially use the funds in their super as a deposit on their business premises, and their SMSF can borrow the remainder from a lending institution in the form of a non-recourse loan, enabling the SMSF to purchase the premises.
The owner’s contributions to their super, and the rent payments from the business, can then be used to pay down the loan. There are often tax advantages associated with this strategy.
The typical SMSF borrowing structure is included below, it is often referred to as a ‘debt installment warrant’:
Owning your business premises in your SMSF fund provides a number of potential advantages. These are included below:
- Assets in SMSF’s attract concessional tax rates:
- All income is taxed at the rate of 15%, which is often less than marginal tax rates;
- When assets owned by super funds are sold, any realised capital gains are concessionally taxed;
- If the assets have been transferred to pension phase then any income they earn or any capital gains realised are tax free.
- Instead of the business paying rent payments to a landlord, rent payments can be paid by the business to the SMSF. These funds can then work for the business owner in their SMSF by paying down the loan or providing additional funds for investment.
- Assets held in a SMSF have an additional layer of protection from creditors in the case of bankruptcy.
If you would like further information regarding this strategy please contact a financial advisor like Praescius Financial Consultants.
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