Getting extra money into super fund by leasing your business property the right way
Leasing your business property from your self managed super fund can be a great strategy for wealth creation, but it needs to be done right, otherwise it could backfire on you in a financially devastating way.
The common strategy involves your self managed super fund purchasing your business property and then leasing the property to your business who pays rent. The rent is paid into your super fund at a lower marginal tax rate (15%).
But when it goes wrong you could have to pay the higher marginal tax rate (45%) plus penalties. The ATO has power to audit self managed super funds and impose penalties on the fund and you as trustee.
The golden rule in getting it right is the lease needs to reflect what a normal commercial lease between would look like. This involves:
Paying market rent.
The rent needs to reflect a valuation or appraisal of market rent. If you are audited, this will be asked for. Payments above market value, will be taxed at the highest marginal tax rate essentially undoing all the benefit of having your business lease your business property from your self managed super fund.
Having a written lease and sticking to it.
Things that are far too favourable or that you wouldn’t otherwise see in a lease will not be accepted if you are audited. This is known as the arm’s-length principle. For example, the term should be reflective of usual commercial term like a 3 or 5 years, with rent increases, usually CPI, and a market rent review on the commencement of any optional term. Less common is the situation where your business cannot pay rent, but in that situation, the super fund needs to take the normal action that a landlord would, such as demanding payment or eviction.
Paying rent from your business account into your super fund account on time and providing receipts.
A lot of clients often wonder why the lease needs to be so long and why there is so much detail involved in a lease. The simple answer is that it’s important at the outset to put time and effort into having a well written commercial lease in place so that your super fund can obtain the financial benefit that was intended.
Getting this wrong could be ATO taking action and requiring that your super fund pay more tax than it should have had you got it right in the first place.
At O’Farrell Robertson McMahon we help prepare leases for your super fund that you can be sure will get you the financial benefit intended and comply with the law. Contact Lachlan Edwards on 0427 916 442 or Siobhan Liston on 03 5445 1067.