Finance your future: acquiring your practice premises through an SMSF

The opportunity to invest in property through a self-managed superannuation fund (SMSF) is one that can offer considerable benefits. It should be of particular interest to doctors considering how to structure the financial aspect of purchasing premises for their practice.

Paul Freeman, BA BCom MBA CBMBA GAICD, CEO - Avant Finance

Monday, 3 June 2024

This approach can allow a practice owner to access money currently tied up in an industry or retail superannuation fund to provide the initial capital needed. It also has the potential to deliver longer-term financial returns through leveraged borrowing.

Anyone considering this option needs to be fully informed of the legal and tax implications, and seek professional advice from experts who specialise in setting up and running SMSFs.

More than an investment opportunity

Beyond the financial benefits it’s possible to achieve from investing in commercial property, there are significant business advantages to owning the premises you run your practice from.

Firstly, there’s the security of not being bound to a landlord who may decide not to renew your lease, be slow to make repairs, or keep putting the rent up. Owning your practice premises also means you can avoid the risk of completing an expensive fit-out and having to do it all over again if you are told to move. This also avoids the stress and disruption that moving premises causes for you, your staff and your patients.

If market rents increase, when you own the premises through an SMSF, you will need to reflect this in the rent the practice pays. However, this additional cost is effectively being invested back into your fund, rather than going to your landlord.

Critical to get the structure right

In recent years, regulators have tightened the rules and regulations around property investments through an SMSF. In particular, the ATO recently warned that a fund will fail the ‘sole purpose test’ if it provides someone with a pre-retirement benefit, such as personal use of a fund asset. This means that a practice property cannot be within the same premises that the beneficiary also lives in.

The relationship between the SMSF, the property and the beneficiary is quite technical. It involves the need to set up a bare trust and have a clear structure that determines which entity is responsible for the set-up costs, loan payments, maintaining the asset, receipt of rental income and use of the premises.

All of this is heavily regulated, and the documentation needs to be absolutely accurate, as the consequences of getting it wrong are severe – with penalties potentially up to half the value of the asset. If it’s not 100% right, it’s 100% wrong.

A tighter lending landscape

This clamp down has resulted in fewer lenders being prepared to consider loans for property purchased through an SMSF. Despite this increased caution, commercial medical practices are generally seen as an attractive prospect for lenders still operating in this market. Which puts doctors considering this option in a strong position.