SMSF tax sweetener for business owners

Change: DIY super funds can now borrow to buy a business premises

Business people tend to feel they don’t get too many favours out of the tax system. However, there has been a corker of a loophole available exclusively to them since 2007 – and it just got even more attractive.

Business owners with a self-managed super fund for the past few years have been allowed to buy their business premises through the fund using borrowed money and then lease it back to themselves so they can continue operating from it.

That’s a privileged position, compared with other SMSF trustees. Since 2007, any do-it-yourself super fund has been allowed to take out a loan to buy property but most transactions have to be at arm’s length – you can’t buy a property from somebody you know and you can’t lease it out to yourself, family or friends either.

The one exception has been SMSF trustees using their funds to buy and lease back their places of business.

Given that the capital gains and rent your SMSF earns are taxed at just 10 per cent and 15 per cent, respectively before your retirement and not at all afterwards, one would think such an arrangement would be almost universal among business owners who run their own super.

However, until an Australian Taxation Office ruling in May, do-it-yourselfers who lacked the money to buy their business premises outright avoided purchasing with a loan, because if they did so, they were not allowed to renovate the property in any way.

Anything beyond basic maintenance was considered to have created a new asset and could result in the SMSF being forced to repay its loan immediately. No such restrictions on renovation, or indeed transformation, applied to funds that had paid for a property in cash.

This was all changed in May.

“The ATO took a more generous approach than we expected,” says Leigh Mansell, the technical services manager of SMSF administrator and adviser Heffron, based in NSW’s Hunter Valley. The ATO will now allow any property owned under mortgage by an SMSF to be renovated so long as improvements are paid for with fund assets rather than another loan and do not change the “functional capacity” of the property.

For instance, Mansell says borrowing to buy a shop and then putting in a staff kitchenette and an extra toilet out the back is “probably OK – because it’s still a shop”, although she stresses SMSF trustees need to get professional advice in all cases and even a “private binding ruling” from the ATO in more complicated instances.

What’s clearly not allowed under the new rules, she says, is borrowing to buy an old retail store and then converting it into a restaurant.

“That’s a clear change to the functional capacity,” she says. “Same as if the kitchen in your SMSF investment property burns down you can replace it but if you add an extra room in the process, you have a problem.”

Mansell says the most common query she fields is trustees wanting to borrow to buy vacant land and then put a house on it. The land loan has to be repaid first.

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