Buying commercial property through a self-managed super fund can involve more than the usual contract and title checks. The fund’s structure, intended use of the property, and any borrowing arrangements can all affect how the transaction should proceed.
That is why you should consider SMSF commercial property conveyancing before signing the contract. Identifying ownership or contract issues early can be much easier than trying to correct them once the fund is committed to the purchase.
1. Confirm the Property Fits the SMSF Structure
Before proceeding with an SMSF property acquisition, trustees should consider whether the proposed investment is consistent with the fund’s investment strategy and applicable SMSF rules.
SMSF investments must satisfy requirements including the sole purpose test. There are also restrictions on acquiring assets from related parties, although specific exceptions can apply. Business premises may also be leased to a related business in certain circumstances, subject to applicable rules and market-rate requirements.
These SMSF compliance checks should be considered early rather than after the contract has been signed.
Example: Buying a Warehouse for a Member’s Business
Suppose an SMSF is considering purchasing a warehouse that will later be leased to a business operated by one of the fund members.
The connection between the tenant and the SMSF does not necessarily prevent the arrangement. However, the property and leasing arrangement need to satisfy the relevant SMSF requirements, including rules concerning market terms.
The trustees should obtain appropriate advice before committing the fund to the purchase.
2. Check Who Should Be Named as the Purchaser
Getting the purchasing entity right is particularly important in an SMSF transaction.
The appropriate structure can depend on whether the fund is paying for the property outright or borrowing to complete the purchase. If borrowing is involved, an LRBA may require a separate holding arrangement. Government guidance warns that incorrectly prepared loan or property documents can be difficult to unwind.
Confirming the structure before signing can therefore prevent complications later in the transaction.
3. Commercial Property Contract Review Before Signing
A commercial property contract review should look beyond the purchase price and settlement date.
Depending on the transaction, matters to consider may include:
- purchaser details
- title and registered interests
- deposit and settlement terms
- existing leases
- permitted use
- GST provisions
- adjustments and outgoings
- special conditions
- finance or due diligence conditions
The contract should also be considered alongside the proposed ownership and funding structure.
Our commercial property conveyancing lawyers can assist with reviewing the legal aspects of a proposed commercial property purchase.
Buying Commercial Property Through Your SMSF? Get the property contract and conveyancing requirements reviewed before you sign.
4. Complete Commercial Property Due Diligence
Good commercial property due diligence involves understanding the property itself, not just reading the sale contract.
Depending on the property, enquiries may cover title restrictions, easements, existing leases, planning matters, access and the proposed use of the premises.
Example: The Property Does Not Suit the Planned Use
Imagine an SMSF is considering purchasing commercial premises for a member’s business. The location appears ideal, but enquiries identify a restriction relevant to the proposed use.
Finding this before becoming committed allows the trustees to investigate what the restriction means for their plans.
This illustrates why due diligence for commercial property purchased through an SMSF should consider both the legal characteristics of the property and how it is intended to be used.
5. Pay Attention to Related-Party Transactions
Extra care may be required if the seller, tenant or lender has a connection with a fund member.
SMSFs are subject to restrictions on acquiring assets from related parties. Exceptions can apply in certain circumstances, including qualifying business real property, but whether an exception is available depends on the particular transaction. SMSF dealings also need to comply with applicable arm’s-length requirements.
Trustees should not assume that a property qualifies simply because it is described as “commercial”.
6. Consider Borrowing Before the Contract Is Finalised
If the SMSF needs finance, the borrowing structure should be considered alongside the proposed purchase.
SMSF property borrowing is subject to specific rules and is generally structured through a limited recourse borrowing arrangement. The structure can involve additional documentation and a holding trust.
Related-party loans require particular care. The ATO states that a related party can be a lender, but the arrangement remains subject to relevant requirements, including those concerning arm’s-length dealings.
This is another reason SMSF compliance checks should occur before settlement preparations are underway.
7. Understand the Conveyancing Process
The conveyancing steps for buying property through an SMSF will depend on the transaction and how the acquisition is structured.
The process may involve confirming purchaser details, conducting a commercial property contract review, completing property searches, reviewing title matters, coordinating with the lender where applicable and preparing for settlement.
Our conveyancing lawyers can assist with the property transaction from contract review through to settlement.
Conclusion
Buying commercial property through an SMSF requires careful coordination between the property transaction and the fund’s proposed structure. The contract, title, intended use, funding arrangements and relevant compliance requirements should be considered before the fund becomes committed.
VK Lawyers can assist with SMSF commercial property conveyancing, including contract review, title and property matters, and the conveyancing process through to settlement. As SMSF transactions can also involve financial, tax and superannuation considerations, trustees may need separate advice from appropriately qualified financial and tax professionals.
Planning an SMSF Commercial Property Purchase? Speak with VK Lawyers about the contract and conveyancing requirements before proceeding.
Frequently Asked Questions:
What should I check before an SMSF buys commercial property?
When considering what to check before an SMSF buys commercial property, review the purchasing structure, contract, title, proposed use, existing leases and any finance arrangements. The transaction should also be considered against the SMSF rules that apply to the fund.
What legal checks should be completed before signing an SMSF property contract?
The legal checks before signing an SMSF property contract may include confirming the purchaser structure, reviewing contract conditions, examining title matters and identifying property issues that could affect the proposed transaction.
What does due diligence involve for an SMSF commercial property?
Due diligence for commercial property purchased through an SMSF may include reviewing title information, easements, leases, permitted use, planning matters and other restrictions relevant to the property.
Can an SMSF lease commercial property to a member’s business?
It can be possible in certain circumstances. Government guidance states that business premises can be leased to a fund member, but specific SMSF rules apply, and the property must be leased at market rates.
What are the conveyancing steps for buying property through an SMSF?
The conveyancing steps for buying property through an SMSF can include confirming the purchasing structure, reviewing the contract, completing searches and title checks, coordinating finance where required, preparing settlement documents and completing the transfer.