The new SMSF property blueprint

Smaller family businesses can unlock massive tax advantages by buying their premises through a self-managed super fund. This will be the trend to watch out for.

Now, many family business owners might prefer to sell the family business when it comes time to retire. They shouldn’t hold their breath. An MGI survey released this year found that only six per cent of family businesses were looking to sell because they could get a good price. No one is buying. Acquiring business premises through a self-managed super fund is a safeguard.

It’s unlikely to include established family businesses, which already have property investments and many family members involved but accountants say we can expect more small family businesses to be looking at it as an option to save on tax, and give them more control over the property. And with 73 per cent of family businesses employing between one and 19 people, it could transform the sector.

Superannuation has emerged as a player in the business property market following changes introduced in 2007 that allowed superannuation funds to borrow money to invest in shares, property and other. In 2010, those rules were tightened up. Funds could only borrow to buy an acquirable asset but property is still kosher. Expect super funds that normally wouldn’t have the capital to buy a property to start gearing themselves up once the economy starts to lift.

Tax Office data shows there were about 478,000 self-managed super funds, holding more than $439 billion in assets, as of June 30, 2012. That’s up almost 8 per cent in the number of funds from a year earlier and about 15 per cent more than at June 30, 2010. All of this has been driven by these changes.

David Green, a partner at Deloitte, says buying property through super is unlikely to be of any interest to the larger, more complex, multi-generational family businesses that would tend to own their own real estate, but would attract smaller family businesses.

“I think it’s a trend that will probably happen,’’ Green says. “At the end of the day, it’s about how much equity you have in the fund and whether it’s something you want to do. And it often depends on who has the residual right to the real estate.

It tends to be more for a start-up scenario.”

He says the people running the self-managed super fund would also have to be prepared to gear up.

“The situation with superannuation, so long as you comply with all the requirements, is to ultimately gear it because the super fund only has so much capital and that capital is not adequate to buy the property,” he says. “If you follow the rules correctly, you buy it through the super fund with debt.”

They would also have to change their mindset. “A lot of private business people are not really superannuation-type people. I think for family business people the house is important and to an extent the real estate is important but they are not necessarily the most focused on superannuation until they get more mature and their circumstances change.”

Still, it’s worth considering just for the tax benefits, Geelong based accountant Richard Coumans says that if the property is owned in your personal name, you would receive the income and if you are on the highest marginal rate, you’re going to pay 46.5 cents in the dollar on it. In the super fund, however, it’s capped at 15 per cent.

He says it’s a strategy that gives clients more control over the assets and his firm frequently advises family business owners to consider it. “It’s certainly a strategy. And it is popular because people like property and if they can buy it in a better environment, where they are getting those tax benefits and getting protection, it’s a good way to do things,” Coumans says.

“Whether it’s a family business or any business, it’s a fairly sound strategy.  And the asset is well protected so they can invest in something that they have an affinity with, so it’s a good vehicle.”

Of course, there are compliance issues. Geared property is not held directly in the fund. The property is held in a holding trust, which is a separate legal structure, with the SMSF as the ''beneficial owner'' of the property. Correct names have to go onto the title of the property, and the mortgage documents. The super fund trustees have to check the wording of the contracts of sale carefully to make sure all the correct procedures are followed. Arrangements between the landlord (the super fund) and the tenant (the family business) have to be commercial and arm’s length. Breaches of the law can result in a fund's trustee being disqualified, civil penalties or even criminal charges.

“That can be a pain for some people and there’s some cost in it so you’ve got to weigh that up. There is more compliance from your accountant to make it all work. There’s a bit more cost and complexity but if you weigh it up, the benefits should still be there,” Coumans says.

Canberra based accountant Wayne Bolin says the other great advantage is capital gains. “If you have a capital gain in the future, you’re better off with the super fund. The super fund would only pay a capital gain of 10 per cent whereas an individual could be paying 23 per cent,” he says.

Of course, it’s early days. The changes brought in for superannuation were superseded by the global financial crisis and family businesses are still recovering.

That means one thing: self-managed super funds are unlikely to gear up in this economic climate so they won’t be major players in the family business property market at this stage. But the conditions are there for a pick up once the economy lifts and small family businesses identify the tax advantages of using their super fund. Watch this space.