For many medical professionals, buying a commercial or residential property through their Self Managed Super Fund (SMSF) to set up their private practice can be a sound investment decision, but is it the right strategy for you and your circumstances, goals and needs?
Establishing or purchasing an existing private practice premises within your SMSF can unlock several potential tax considerations. However, the potential benefits will depend on various factors, including the specific circumstances of the SMSF and the medical practice, as well as relevant tax laws and regulations. It’s not a one-size-fits-all strategy and must be approached as such.
However, like with all financial and career decisions, correct structuring, careful planning and adherence to all the legal and regulatory requirements are crucial. If you would like to chat with a DPM Lending Consultant about this topic and how we can provide tailored and specialist advice, please book a free, no-obligation consultation with one of our expert team members here.
We’ve packed this article full of essential information to help you better understand whether this might be a solution for you. So, if you’re not ready for an appointment yet, have a read. We’ll be more than happy to chat if you later decide this is an option you’d like to explore.
So, what should you think about? 🤔
When contemplating any large purchase, there are many considerations to keep in mind, especially when it’s a business purchase.
When it comes to using your SMSF for these purchases, here are the main points we recommend you consider:
Establishing the SMSF:
- Ensure the SMSF is set up and established correctly according to legal requirements. A rock-solid base of a well-structured SMSF will start you on the right track.
- Appoint trustees for the SMSF, including fund members or a corporate trustee.
- Consider the trustee obligations and knowledge requirements associated with an SMSF and seek professional advice to confirm its suitability for your needs.
Defining your investment strategy:
Along with the SMSF Trust Deed, the Investment Strategy is a document that outlines the governing rules of the fund, which act as guidance for the trustee/s when making decisions. It provides the investment parameters and guidelines for the fund when making investment decisions, including the following:
- Investment objectives, needs, and preferences
- Allowable assets, exposure requirements, and an articulated investment approach
- Risk exposure and return expectations
- Diversification
- Liquidity needs
- Ability to discharge liabilities and meet financial obligations as they become due
- Consideration of insurance needs of the members
The strategy needs to outline how the Investment Strategy is expected to achieve each member’s retirement objectives, in consideration of their age, employment status, retirement needs and risk appetite.
The Investment Strategy must be documented and reviewed on a regular basis to ensure it continues to reflect the members’ circumstances. In addition, all decisions should be documented, including the decision to make no changes upon review.
This is not something you should copy off a template online, due to the intricacies involved in drafting a complying document to avoid penalties. Everyone’s goals, risk levels and circumstances are different and unique, so you should adequately establish your levels and what you are comfortable with.
Consider whether investing in a medical practice premises aligns with the SMSF’s Investment Strategy and objectives, which should be documented and reviewed regularly. Researching the financial capabilities and realities of relevant and similar medical practices will define whether this investment should fall under your SMSF.
Purchasing the medical practice:
- Determine the legal structure for acquiring the medical practice. This could involve a corporate ownership structure or acquiring the assets directly.
- Ensure the purchase is made at arm’s length and market value to comply with superannuation laws.
- Conduct thorough due diligence on the medical practice to assess its financial performance, liabilities and potential risks.
- Seek professional advice from legal and financial experts to structure the purchase transaction effectively.
Finance the purchase:
- Determine the funding strategy for the purchase, considering available funds within the SMSF and potential borrowing arrangements. This includes considering rental income vs. loan repayments and other outgoings.
- If borrowing is required, explore limited recourse borrowing arrangements (LRBA) to finance the acquisition, ensuring compliance with superannuation laws and borrowing restrictions. Assess the SMSF’s liquidity to ensure it can meet short-term cash flow needs, significantly if rental income is delayed or expenses are higher than anticipated, especially for those cases where pension payments are to be drawn.
- Also consider upfront fees, ongoing administration costs and any exit fees associated with the loan.
Exit Strategy:
- Plan how and when the property might be sold or passed on. Ensure there’s a strategy for managing any capital gains or losses on sale or succession.
- Consider how the SMSF will manage or repay the loan in various scenarios, including retirement or if the fund needs to liquidate assets.
Professional Advice:
- Seek advice from a financial adviser with expertise in SMSF investments and borrowing. They can help navigate complex regulations and ensure compliance with superannuation laws.
- Consult a legal expert to ensure the borrowing arrangement and property purchase meet legal requirements.
Each SMSF is unique, so it’s crucial to tailor these considerations to the fund’s specific circumstances and goals.
When using finance towards the property purchase, it must be quarantined from the other assets in your SMSF via a bare trust and, importantly, it must be a single acquired asset purchased in one transaction. This entails that you cannot buy land and then put buildings on it, do substantial development or change the use of the building (i.e. from residential to commercial). Your purchase must be an existing commercial premises you rent out to your business.
DPM has access to lenders who will consider funding 70-100% of your purchase over 25-30 year terms. Some lenders on our panel can also approve separate funding for your fitout and equipment purchases, as well as the legal and set-up costs of your SMSF.
Compliance and Reporting:
- Ensure compliance with all relevant superannuation laws, taxation regulations and healthcare industry standards.
- Keep accurate records of all transactions related to the purchase, fit-out and ongoing operation of the medical practice within the SMSF.
- Prepare and submit necessary reports and documentation to regulatory authorities, including the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).
Professional Advice:
Seek advice from qualified professionals, including lawyers, accountants, financial advisers and SMSF specialists, throughout the process to ensure compliance and mitigate risks.
So why may an SMSF be considered for your private practice acquisition?
Your SMSF potentially provides a more tax-effective structure and your practice does not have to tie up its capital for the property acquisition because your SMSF is doing so. DPM has lenders that will consider anywhere from 70% to 100% of the finance of your practice within your SMSF. Owning your practice within your SMSF also potentially offers protection for your investment should you face financial difficulty.
Your decision to fund your practice via your SMSF needs to be carefully assessed and align with your financial circumstances, goals and needs.
A drawback to consider is your retirement capital’s high exposure to a single asset and overexposure to the property asset class (albeit it is your own business). The result is a lack of diversification within your super, meaning your retirement capital is susceptible to downturns specific to that asset class and market.
The ownership of direct property through super may also cause liquidity issues due to the nature of the asset. Where insufficient contributions are made to service the SMSF’s obligations, including member income stream payments, liquidity may arise where financial obligations of the property exceed the rental income being received.
This is in addition to the significant legal costs associated with setting up your SMSF and getting a property into the fund, as well as valuation, loan, stamp duty, conveyancing fees and annual audits.
There are a number of factors that in focus when considering owning property through super:
Tax on Rental Income:
Suppose the SMSF owns the premises and leases them to the medical practice. In that case, the rental income received by the SMSF is generally taxed at the concessional superannuation tax rate, which is currently 15% for the accumulation phase and 0% for the pension phase. This can be advantageous compared to holding the property personally, where rental income would be taxed at individual marginal tax rates potentially higher than concessional rates within superannuation.
Capital Gains Tax (CGT) Concessions:
If the SMSF sells the medical practice premises after holding them for at least 12 months, it may be eligible for CGT concessions. For instance, if the SMSF is in the pension phase, any capital gains realised on the sale of the property are tax-free. If the SMSF is in the accumulation phase, it may be eligible for a one-third discount on the capital gain if the property has been held for at least 12 months.
Tax Deductions:
The medical practice may claim tax deductions for expenses incurred in running the business, such as rent paid to the SMSF, salaries, equipment purchases and operating expenses. These deductions can reduce the medical practice’s taxable income, resulting in lower tax liabilities.
Superannuation Contributions:
The owners of the medical practice (also members of the SMSF) may be able to make tax-deductible contributions to their SMSF, subject to contribution caps and other limitations. These contributions can help them build their retirement savings in a tax-effective manner.
Tax on Investment Income:
Any investment income generated by the SMSF’s assets, such as interest, dividends, or capital gains from investments other than the medical practice premises, is generally taxed at concessional superannuation tax rates.
Estate Planning and Inheritance Tax:
Holding assets, including a medical practice, within an SMSF can offer estate planning benefits, potentially reducing inheritance tax liabilities for beneficiaries upon the death of the SMSF members.
It’s important to note that the tax benefits of purchasing a medical practice in an SMSF should be carefully considered in conjunction with the broader financial and investment objectives of the SMSF and its members. To make an informed investment decision, we encourage you to seek advice from DPM’s qualified tax professionals and financial advisers to ensure compliance with tax laws and regulations and optimise your SMSF structure’s tax efficiency.
If you’d like to have a chat to a specialist financial planner to discuss strategies for taking a career break, we’d welcome you to book a free, no-obligation consultation with one of our Private Wealth Consultants.
Disclaimer: *The information contained in this site is general in nature and is not intended to serve as advice, as your circumstances, needs and goals have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before acting.
