Using an SMSF to purchase commercial premises for medical practitioners

Published on: January 16th, 2024

As a medical practitioner and business owner, one of the key components of your financial journey is deciding whether to acquire or invest in commercial premises for your practice. In this article, we will delve into the benefits and considerations associated with purchasing your commercial premises through your self-managed super fund (SMSF).

What is an SMSF?

An SMSF is a retirement savings structure that provides individuals and groups with more control. The members of an SMSF are also its trustees, which means they have the responsibility to make decisions about the fund and comply with the legal and regulatory requirements. SMSFs can be used to hold a range of investments, including shares, term deposits, managed funds and property – including your own business premises.

What are the potential benefits of purchasing your practice premises via an SMSF?

Tax benefits

Rental income generated from the commercial premises is taxed at the concessional rate of 15% in the SMSF. Upon selling the property after retirement, the capital gains tax is reduced to zero if the SMSF is in the pension phase.

Asset protection

Assets held within a compliant SMSF are typically protected from creditors in the event of business difficulty or legal disputes, offering medical practitioners sound financial security.

Flexible arrangements

Medical practitioners may enter a lease agreement with their SMSF, allowing them to pay rent to the fund and claim it as a tax deduction. This creates an additional income stream for the SMSF and reduces the individual’s taxable income.

Control over investment decisions

Members have direct control over the investment decisions related to the commercial property, including the choice of property, maintenance, and negotiating terms of the lease.

Potential for capital appreciation

Like any property investment, commercial premises purchased by an SMSF have the potential for capital appreciation, which can contribute to creating a more comfortable retirement nest egg.

Things to consider before making a move  

Understand the costs and risks

The expenses associated with property investment, including stamp duty, acquisition fees, legal costs and maintenance expenses, should be thoroughly analysed. Additionally, investors should be aware of the diversification risks involved in holding a significant portion of their retirement savings in a single asset.

Familiarise yourself with compliance requirements

It’s essential to comply with SMSF rules and regulations, as non-compliance can result in penalties, disqualification or even prosecution.

A key one for practitioners going down this path is that all costs associated with the investment property must come out of superannuation, and rent must be paid on commercial terms and market rates into the SMSF. This is known as an ‘arm’s length’ agreement.

Additional terms for those using finance for the purchase

In addition, there are extra requirements for those using finance to buy the property. Financing for property purchase under an SMSF is known as ‘limited recourse borrowing’. It is so-called because the lender only retains security via the property and cannot touch the other assets in your SMSF should anything go pear-shaped.

When using finance towards the property purchase, it must be quarantined from the other assets in your SMSF via a bare trust and, importantly, it must be a single acquired asset that is purchased in one transaction.

Essentially, this means you cannot buy land and then put buildings on it, do substantial development or change the use of the building (e.g. from residential to commercial). It must be an existing commercial premises that you rent out to your own business.

Engage professional advice

Just as you wouldn’t recommend your patients make medical decisions without the requisite knowledge and advice, the same can be said for your finances. Choosing to set up an SMSF or using an existing one to purchase your commercial property can be a sound financial decision, but it is important that you seek expert legal and financial advice and get your experts working together to ensure it is the right move for you.

In conclusion, using an SMSF to purchase commercial premises can provide medical professionals with potential tax advantages, asset protection and increased control over their investments. However, it’s essential to seek professional advice and familiarise yourself with the relevant regulations to make a well-informed decision.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.