For many Small and Medium Sized Enterprises (SME’s) owning a business premises is an attractive proposition. We all have different reasons, but for many it can be as simple as controlling your business and premises, guaranteed tenure, location or a retirement nest egg. Conversely it could also be that many SME’s are too busy managing their business affairs and do not have time to effectively manage investments in other asset classes.
To own your business premises you can use a Self Managed Super Fund (SMSF) to borrow funds and purchase a property. For many SME’s this is a real option. If your super is not held in an SMSF you will need to establish one. A good starting point would be a minimum of $200,000. Your SMSF can borrow via a Limited Recourse Borrowing Arrangement (LRBA). The asset purchased is held as security by the funder and they do not have access to other assets held in the fund for future recourse. In general terms your SMSF obtains a loan and you repay this over a period of time.
Buying in an SMSF structure brings many advantages. Some of the advantages include not tying up valuable capital from the business to complete the purchase. Equally you’re not tying up equity in other real estate assets you may own outside of super. Another advantage is the inherent tax benefits of building wealth in your SMSF for members beyond retirement. Lastly a key item is the ability to repay the debt in really short timeframes.
SME’s are able to take advantage of the low interest rate environment we are currently experiencing. Potentially the interest repayments could be lower than their current rent. The real power of borrowing within super is the ability to use member contributions in addition to the rent to repay the loan. By maximising contributions into your fund each year, you can accelerate the repayments and dramatically reduce the loan term. By maximising contributions into your fund, you’re also able to reduce the tax paid at your business level.
We have worked with many clients to model scenarios that match their individual circumstances. By understanding their cash flows and what’s available in super, we have been able to design accelerated repayment programs. In certain examples where clients are confident of being able to make the maximum contributions in super, we have been able to demonstrate the ability to repay loans within seven years. This is substantially quicker than loan terms for borrowers outside of the SMSF structure.
Let’s not forget why super was been implemented in the first place. Our super is designed to ensure that we have sufficient income to live from when we retire. The benefit of having funds in super in post retirement years will ensure a very positive tax outcome for the members of the fund. Using your business to grow your super assets is an effective strategy and one that can afford you a great deal of control.
Before you enter into a LRBA there are issues that need to be identified and understood. You will need to seek advice from your professional advisors to ensure this is a legitimate option for your circumstances. As with any business decision knowledge is power and understanding the full scenario will assist you in making a decision whether the combination of an SMSF and LRBA can work for you.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.