SME LOANS WITH OPTIONS FOR SUPER

AFR – Wednesday, 15 Sep 2021 – Page 24

Michael Jiang’s grocery business has been given a boost by a federal government-backed scheme enabling cheaper loans to expand operations, including buying commercial property. Strategy Government-backed funding for pandemic relief can ease retirement plans, writes Duncan Hughes.

Michael Jiang’s grocery business has been given a boost by a federal government-backed scheme enabling cheaper loans to expand operations, including buying commercial property.

For business owners like Jiang, the scheme enables strategies to navigate businesses out of COVID-19 setbacks and creates the option of using commercial premises as an asset for superannuation.

The value of non-residential property in self-managed super funds, including anything from barristers’ chambers to manufacturing warehouses, has increased by 12 per cent to a record $80 billion in the 12 months to June, according to the Australian Taxation Office . The rise is more likely to reflect a sharp increase in property values than a surge in SMSF property investments, investment specialists say.

Jiang, who took over the family business in Pyrmont 15 years ago, has refinanced his business through NAB to pay for renovations , equipment and growing online food and drink deliveries. He also hopes to further community assistance through the Uniting Church’s CHEX program.

‘‘ I’ve been one of the lucky ones,’’ Jiang says of the impact of COVID-19 . ‘‘ People need to buy groceries and are drinking more takeaway alcohol because of the closures.’’

NAB says the new loans, backed by the federal government under the Recovery Loan Scheme, which guarantees 80 per cent of the borrowing, offer longer terms and extended loan-to-value ratios, with rates based on individual circumstances. Other lenders, such as Westpac and CBA, are finalising their new rates and conditions.

Jiang is also exploring options to fund retirement that might include setting up a self-managed super fund that would buy his commercial property, on the understanding it would provide income and capital growth.

Mortgage brokers say lenders are improving offers to small and medium enterprises after the government extended the Recovery Loan Scheme.

Business borrowing for property is booming , with lending topping $7.6 billion in July – up more than 5 per cent from the previous month and about 136 per cent year-on-year , according to government analysis.

COVID-19 has blown out vacancy rates in commercial sectors, such as CBD office towers, and some retail, including restaurants and entertainment sites.

But it has contributed to strong demand for logistics and industrial buildings used as storage and distribution networks for the growing digital economy.

‘‘ The government scheme recognises the degree of difficulty and cost that small businesses can experience in funding maintenance and expansion of their businesses in times of uncertainty,’’ says Steve Mickenbecker , group executive for Canstar, which monitors rates.

A business owner can buy work premises personally, via the business or an SMSF. There are different tax, cost and administrative liabilities, Mickenbecker says.

There are about 330,000 people running businesses with no employees and another 540,000 self-employed with a few employees , according to government statistics.

Super balances for self-employed males aged 60 to 64 average about $143,000, compared with $283,000 for male wage and salary earners, the Association of Superannuation Funds of Australia says. The numbers are based on a 2017 sample.

About one in five self-employed have no super, compared with 8 per cent of employees , says ASFA. A higher proportion of self-employed also have ‘‘ low’ ’ super balances of less than $40,000. That’s because the self-employed often put more energy and time into their businesses than preparing for retirement, an ASFA spokesman says.

The number of businesses setting up SMSFs has plunged during COVID-19 , says Paul Rafton, superannuation partner with accountancy, tax and advisory company BDO.

Big lenders no longer offer SMSF loans for commercial property, while other lenders have much higher rates and tougher terms to reflect the increased risk.

Regulators fear problems arising when SMSF investors leverage their super to invest in a single property because of a lack of diversification and potential loss in a falling property market, when it is difficult to find tenants. Systemic risk is low because the loans are non-recourse , which means they are secured by the property.

Having a commercial property for a self-managed super fund ‘‘ is an option’’ , Anne Graham, chief executive of Story Wealth Management, says. However, investors need to consider the risks.

‘‘ What happens if you have an office being rented to third parties that’s not quite up to scratch in current markets, where supply exceeds demand?’’ Graham asks.

There’s also a risk, with a chunky asset – like a factory or warehouse – in a super scheme coming up to retirement, if there is a financial crisis and prices fall.

Further, selling premises as part of a package can create difficulties , particularly if the person selling is the key asset.

‘‘ That said, people like to feel in control of their money by getting to choose their investments,’’ Graham says.

Mark Chapman, tax director for H&R Block, says: ‘‘ In general, investing in commercial premises rather than residential through an SMSF has some advantages. Commercial properties can, for instance, be sold to an SMSF by its members as well as leased to SMSF trustees or an individual or business related to them.’’

An investment must satisfy the sole purpose test, which is to provide retirement benefits for its members.

‘‘ When investing in commercial real estate, the SMSF trustees have the option of investing 100 per cent into commercial premises if a member of the fund runs a business,’’ Chapman says.

‘‘ This is an attractive proposition for small businesses who want to own the premises from which they operate. Investors or businesses that already own a commercial property can contribute the property to the SMSF,’’ he says.

It has to be done at market value and is subject to the annual contribution caps, which are $27,500 for concessional contributions and $110,000 for non-concessional .

‘‘ Transferring property may have capital gains, stamp duty and other tax implications , so always get advice before making concrete plans,’’ Chapman says.

Leasing property to a related party must be done on the same terms as an independent third party.

‘‘ If you were leasing to an independent third party, a lease agreement needs to be in place, outlining the terms and conditions of a standard commercial agreement,’’ he says.

That means market rent will need to be paid regularly and physically into the SMSF bank account. This generates a tax deduction to the business and taxable income – taxed at 15 per cent – in the SMSF. The property will need to be independently valued.

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