Transferring Commercial Property into a SMSF

Author: Emma Partenza, Manager, TAG Financial Services

Business owners can sometimes financially benefit from transferring commercial properties into a SMSF that may be currently held by them (or a related party) personally, given it:

    • allows their business to pay themselves rent;
    • the business tax rate is higher than the SMSF tax rate, allowing tax benefits overall to the family group; and
    • within the SMSF, where members are in retirement phase, the earnings and capital gains can be tax free.

For Trustee’s wishing to transfer commercial properties into a SMSF, the property must first satisfy the definition of Business Real Property (BRP). Only BRP can be purchased by a Fund directly from a related party, or contributed to the fund by a related party, without breaching the asset rules.

Business Use Test

BRP is freehold or leasehold interest in real property that is wholly and exclusively used in one or more businesses. This business use test must be applied at the time the property is being transferred to the SMSF for it to be eligible. When dealing with related parties, it is critical these transactions are undertaken at market value, arm’s length terms.

Commercial or Residential zoned?

There is no requirement for the property to be zoned commercial for it to qualify as BRP. Many residential homes, for example, may qualify as BRP – but they must wholly and exclusively be used in a business. Dentists or medical practices often run out of older residential properties.

What about WFH?

Now that most of the population have been working from home during pandemic lockdowns, does not mean that our principal places of residences can now become BRP! The business use test (wholly and exclusive test) is critical in this determination. The whole of a premises must be used wholly and exclusively in a business. Yes, we are working from home, but many are not running their business wholly and exclusively from their residence – they are also living there. Properties such as this will fail the requirements and will not be able to be contributed into SMSFs.

If you have any questions or would like to discuss this further, please contact us on 03 9886 0800 or via email.

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).Copyright 2021. Please do not reproduce without the expressed written consent of the author.