The great SMSF property loan mystery

Small businesses enjoy a range of tax benefits and other perks if they purchase commercial property via self-managed super funds. So why are they undergeared?

Bankers are mystified at the lagging uptake of loans to buy commercial property using self-managed super funds.

While gearing for residential property purchases via SMSFs is growing at the rate of knots, to be one of the fastest -- some say the fastest -- growing categories of loans offered by Australian lenders, borrowing for the commercial property equivalent is only accelerating at around half the rate.

This is particularly perplexing as small businesses enjoy unique tax and other benefits when using their SMSF to purchase commercial premises.

The outright value of property held in SMSFs in Australia is a healthy enough split. The Tax Office calculates residential property within superannuation jumped to $20.4 billion in the year to September 2014 from $17.9bn, while commercial property holdings rose to $67.8bn from $59.4bn -- a rise of 14 per cent for both categories over 12 months.

Loans to SMSFs, the limited recourse borrowing arrangements, are estimated by the ATO at just $9.21bn, although the official statistics do not split out residential from commercial purchases. However, industry practitioners question that figure, saying years of observation puts estimates for outstanding loans on SMSF property to be more like $17bn-plus.

That discrepancy aside, it is the residential/commercial split that has mortgage sellers scratching their heads.

Best estimates peg outstanding industry loans on commercial property SMSF acquisitions at $10.5bn of the pool, a gearing of 15 per cent. That compares with around $7bn, or a much heftier 35 per cent gearing for residential SMSF properties.

“What we’re seeing is a relatively greater appetite (for loans) from residential investors than small business owners,” says one SMSF lender.

Part of the explanation is undoubtedly that small businesses may simply not need to borrow. Perhaps they already own the property they want to transfer to the super fund. That’s allowed for commercial property, but not under residential SMSF property rules.  

Small business is reasonably exposed to SMSF property, as the $68bn value given by the ATO reveals. They are just not borrowing to do it at anything close to the rate of SMSF uptake of residential property, which has been wholeheartedly embraced since the leverage rules changed in 2007.

And lenders believe there is plenty of scope to get that $68bn figure much higher still if small business were alerted to the unique tax benefits offered, which they are quick to note are “perfectly legal, enshrined in the legislation. There’s nothing wrong with it”.

Surveys suggest more than half of all small business owners are either not aware or not taking advantage of these perks.

The primary benefit is that small business tax concessions can substantially reduce the capital gains tax liability when the property is sold, and in the pension phase a zero tax rate applies. Advice from an expert accountant, solicitor and financial adviser is crucial to get this right as timing is everything to extract the unique special tax concessions that apply.

But the pay off can be substantial.  Unlike residential property, acquisition of commercial property via an SMSF allows purchase of the business premises -- the farm, factory, butcher shop, office -- by a related party of the fund, so the butcher’s SMSF can buy the shop from the butcher. The property can then be leased back to the butcher, or his family or friends -- a stark contrast to residential SMSF property rules. So you are saving for retirement while paying rent you were paying anyway on your business premise.

While a property held within an SMSF cannot benefit from negative gearing, the likelihood is that the minimisation of capital gains tax will more than offset this.

The Murray review has come out strongly against borrowing inside superannuation, so if adopted, the window to borrow for SMSF non-residential property is closing. Some predict a spike in activity in the next two years before any change kicks in.

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