A strategy some business owners use to improve business while investing in their own future is to rent their business premises from their self-managed super fund (SMSF).
The superannuation industry is highly regulated, so how does this work with all the red tape? And how does the business owner and SMSF claim tax deductions for this scenario, including depreciation?
What is an SMSF?
An SMSF is a type of private super fund that can hold up to six members. It has the same purpose as any other super fund – to set the members up for retirement.
This type of super fund differs from traditional retail or industry funds as the members are often also trustees. This means members have many responsibilities to ensure their fund is managed in compliance with strict superannuation laws.
One of the same; SMSF member and business owner
A business owner can be an SMSF member while running their own business separately to the fund. However, this is on the condition that any dealings between the SMSF and the business are done on an arm’s length basis.
This means the business and SMSF can’t exploit the system by purchasing and selling assets to each other at a rate that is well below market value. The purchase or sale of a fund asset (e.g. property, shares) must always reflect the true market value of the asset. Any income that is earned as a result of a non-arm’s length transaction on the SMSF’s behalf will face a higher tax rate on the income source.
A business owner can use a commercial property that is owned by their SMSF as their business’s premises. The SMSF can even purchase the property from the business and rent it back out to them to improve the business’s capital position – as long as it is done through an arm’s length transaction.
Case study – business operating from an SMSF property
Anthony is a chef and runs his own restaurant. He is also a member of an SMSF.
The property he operates his restaurant from is owned by the SMSF he is a member of. He moved his business to this property following its acquisition by the SMSF.
Therefore, Anthony rents this property at market rates from his SMSF, giving him security over the lease term for the business while benefiting his future through his SMSF owning the property as it receives a steady income.
How does depreciation work in this scenario?
Depreciation is the natural process of wear and tear, it happens to most assets including property, vehicles and furniture. An SMSF can claim this depreciation on any eligible property it owns under the fund, while business owners can take advantage of depreciation of the assets they use for business purposes.
In this scenario, depreciation is still split into two parts as per the case study below:
Case study – continued
Anthony will be able to claim only the fit-out he owns in the property against his business’s taxable income. This includes assets like restaurant furnishings, kitchen equipment, and point of sale systems.
Meanwhile, the depreciation available on the structure of the property and fixed assets owned by the owner (in this case, the SMSF) must be claimed separately and under the SMSF’s tax assessment. This means depreciation deductions will be against the concessional SMSF tax environment of 15 per cent.
Businesses and SMSFs must ensure depreciation claims remain compliant
Depreciation can shave thousands off a tax bill every year, so these claims are often, and understandably, looked at in detail by the Australian Taxation Office (ATO). Businesses and SMSFs alike can ensure they maintain full compliance and avoid ATO scrutiny with a tax depreciation schedule.
This schedule is a document that lasts the lifetime of a property. It outlines all depreciation deductions that are available each financial year and is used by an accountant at tax time.
BMT Tax Depreciation specialises in these schedules for all types of property, both residential and commercial, and whether they are owned by individuals or entities. SMSF members and businesses are encouraged to discuss their depreciation option with BMT Tax Depreciation & Quantity Surveyors on 1300 728 726
Original story published by BMTQS
20 October 2021
Contact BMT Tax Depreciation & Quantity Surveyors on 1300 728 726 or www.bmtqs.com.au