In the first part of this series we covered the initial three key questions you should be asking yourself before purchasing medical consulting rooms using your super via an SMSF.
The next three questions you should be asking are:
How much money can I get into super and how much can I borrow?
Should you require borrowing to fund the purchase of a commercial property, most lenders would only lend up to 60-70% of the value of the property via an SMSF (under the Limited Recourse Borrowing Arrangement (LRBA) rules), so you would need to have at least 30% of the value of the property either in your super fund (plus the super fund of your spouse and up to 4 other family members). Although some specialist lenders may lend up to 90% of the value of the property under certain circumstances, so it pays to shop around.
Further having the ability to contribute funds into superannuation to have sufficient equity for the property purchase would also be to your advantage. You also can’t borrow to fund any repairs or renovations under the LRBA rules, these expenses would need to be funded by cash within the SMSF.
So, wishing to purchase $2 million rooms with a super balance of $150,000 is probably not going to be feasible (unless you had significant other cash for contributions). The limited recourse nature of the SMSF lending structure means that and you cannot use other property as security for a loan.
The debt within the SMSF also needs to be repaid, so you will need to have enough time to clear the loan through future contributions and cashflow of the SMSF ideally prior to retirement.
So, is an LRBA financially feasible within the SMSF structure given other ownership lending options available if you require debt to purchase? Particularly if the debt is only 15% tax deductible via the SMSF.
What financing options are available to me?
If you do go down the finance for a purchase, explore financing options available for SMSFs, such as limited recourse loans from banks or financial institutions are critical. The key criteria are to compare interest rates, loan terms, fees, and repayment schedules to select a financing option that suits your SMSF’s financial position and investment objectives. Typically, we would liaise and collaborate with a suitably qualified mortgage broker who has experience dealing with SMSF finance to ensure a good experience.
What are the tax implications of using an SMSF?
Purchasing medical consulting rooms through your SMSF can offer some good tax benefits as the rental income generated from the property is generally taxed at the concessional rate of 15% within the SMSF.
Then when you retire and commence a pension*, any rent or realised capital gains (on future sale of the property) within your fund is taxed at 0%.
Further your practice/service trust could be structured to pay rent to your own SMSF within the super rules, therefore meaning that your practice is helping to fund your own retirement savings in a tax effective manner as opposed to paying rent to a third party.
As always, we would be collaborating with other relevant professionals such as accountants and lawyers around optimising tax efficiency, structuring and maximising the benefits of property investment within your SMSF. Particularly should your practice be also renting from your own SMSF.
The final 3 questions to be asking will be covered in our next edition.
As in all financial matters that have some complexity, it’s essential to seek advice from professionals with expertise and understand the unique challenges and opportunities faced by medical specialists. At Boutique Advisers Private Wealth, we understand the medical sector, and through our Five Pillars of Advice journey help our clients make Confident Life Decisions about their Wealth. Contact our team if you would like to know about this strategy & whether it would be suitable for your circumstances.
*Up to the maximum pension limit (Transfer Balance Cap) which at time of publishing is $1.9m per person