The pitfalls of renting from your self-managed super
One of the biggest challenges a self-managed super fund can face is when the tenant of a highly valuable, fund-owned commercial property fails to pay the rent.
Much of the fund’s financial wellbeing may depend upon regular payment of rent – particularly if a heavily geared property is the fund’s sole or dominant asset.
The fund, of course, would be expected to take all necessary action to try to recover the overdue rent and, if necessary, remove the financially troubled tenant from the premises.
But imagine how the difficulties for your fund could escalate if the wayward tenant were your family business.
Be warned, many family SMSFs and family businesses are at risk of becoming embroiled in such inter-family disputes.
“Many of the businesses we see now see are struggling,” says Martin Murden, a director of Partners Group, financial services provider to accountants. He is the author of How to Invest in Property Through your Self-Managed Super Fund, recently released by Major Street Publishing.
Before entering a landlord-and-tenant arrangement between your business and your super fund, Murden, an SMSF specialist, urges his clients to think about what could go wrong.
It is a common practice for a family SMSF to own the premises of the family business in order to gain a range of retirement, tax, business, and asset-protection advantages.
Your family business pays a commercial rent to your family SMSF. And your fund claims tax deductions for interest on the loan to buy a typically geared property.
Further, the property is generally out of the reach of creditors if individual fund members are declared bankrupt – subject to claw-back provisions in the Bankruptcy Act.
And if your SMSF sells the property once fund assets are backing the payment of a pension, no capital gains tax is payable on the sale.
It can, however, be a matter of conflicting loyalties and pressures if your business encounters financial problems and fails to pay its rent.
On one side, the family business may require those premises to keep operating in the hope that profits will return. (In a many cases, a business than cannot pay rent to its own SMSF will struggle to pay rent to another landlord – even for poorer-quality premises.)
Yet on the other side, the fund’s trustees – who are the same people as the business owners in these circumstances – are legally obliged to maintain the fund with the sole purpose of providing member retirement benefits.
In any case, Murden says SMSFs with commercial properties generally have to borrow to buy and require regular rent to meet their loan repayments.
Businesses experiencing financial difficulties usually become slower to pay their creditors. And Murden says a decision is sometimes made, consciously or unconsciously, that the last creditor to pay is their owner’s self-managed super fund.
He stresses that if a member’s business is not paying its rent to the family SMSF, the retirement savings of the members are being jeopardised.
Murden’s firm is currently advising an accountant regarding a business that cannot pay its rent to the business owners’ SMSF. He has raised such questions with the accountant as: How good is the business? Should the business move into cheaper premises to enable the SMSF to find another tenant?
