Small business owners pushing for self-managed super gearing of business premises

SME owners are likely to accelerate existing plans to gear their business premises through their self-managed super funds after renewed debate about whether to bar future superannuation gearing, say advisers to SMSFs and small-medium businesses.

Business owners are among the biggest supporters of self-managed super with superannuation gearing to acquire business premises becoming an increasingly popular strategy.

The recent interim report of the Australian government’s current inquiry into the financial system, chaired by David Murray, is calling for views about whether superannuation gearing should be prospectively prohibited.

“If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems,” the inquiry observes.

The inquiry’s final report is scheduled to be delivered to the Treasurer by November 14, although it is not known how long the government may take to react to its final recommendations.

SMSF specialist adviser Peter Crump says: “Where there is a hint that an investment opportunity may be closing, people who have been thinking about it should stop vacillating and make a decision – one way or the other.”

Crump, superannuation strategist for financial advice company ipac South Australia, believes that the financial inquiry’s call for views about the possible future barring of super gearing may prompt SME owners who have already been considering gearing their premises to focus their attention.

And Crump says good advisers have a responsibility to alert clients who had been discussing the gearing strategy with them about the possible impact of the financial inquiry.

“I think as advisers, we have a responsibility to keep our clients fully aware; otherwise we have let them down,” he adds. Crump is chairman of the SMSF Professionals’ Association of Australia (SPAA).

SMSF auditor Martin Murden believes the raising of the possible removal of superannuation gearing is a “potential trigger” for SME owners who had been examining whether to gear their business premises through their SMSFs to reach a decision.

Murden, a director of SMSF consulting and auditing with the Partners Wealth Group and author of How to invest in property through your self managed super fund, says the financial inquiry provides something of a deadline for SMEs to make up their minds.

And Naree Brooks, a partner at PwC Private Clients, makes a similar comment: “If SMEs had been thinking about gearing their premises through their SMSFs, the Murray inquiry may bring forward the decision making.”

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Sue Prestney, a partner at PwC Private Clients, says the majority of her medium-sized business clients up to August 1999 had acquired their business premises through their SMSFs, using geared trusts associated with the members. (The law had changed at that date, making such trusts so-called in-house assets of the funds and effectively ending the future gearing of SMSFs in that way.)

Prestney estimates that at least 30% of SMEs who have become her clients since 1999 now hold their business premises in their SMSFs with some of their SMSFs gearing through limited recourse loans, permitted under strict conditions for the past seven years.

“SMEs generally have their resources tied up in their businesses,” Prestney adds, “and usually the only way they can buy their business premises is through their super funds.”

Depending upon the circumstances, the holding business premises in a business owner’s SMSF can provide tax, asset protection, estate planning and business succession benefits.

Since September 2007, super funds have been permitted to borrow to invest – as an exemption to the general bar on borrowing – using limited recourse borrowing arrangements. Geared asset must be held in a holding trust until the loan is repaid.

SMEs owners who hold their business premises in their SMSF must pay an arm’s length rent to the fund, which pays concessional tax on the rental income.

Business property is one the few types of assets that SMSFs are allowed to acquire from their members and other related parties. As well, business property is one of the few types of assets that funds can lease to related parties, including the members’ businesses – without being limited by the in-house asset rules in superannuation law.

The ATO’s latest self-managed super fund statistical report shows SMSFs owed $2.72 billion in limited resource loans in March, up from $497 million in June 2009. These loans represent half a percent of total SMSF assets. The value of commercial property held by SMSFs is three times greater than the value of their residential property.

PwC’s Brooks says the gearing of businesses premises through SMSFs is increasingly popular among SME owners. Brooks believes a “second wave” of business owners are following the strategy, having progressively built-up their super balances under the more restrictive contribution caps. Further, limited recourse loans are more competitively priced.

Surveys by Investment Trends suggest that 38,000 SMSFs hold geared investments and that one of the main reasons why members of large super funds say they intend to setup an SMSF in the future is to invest in property.

This article first appeared on SmartCompany.