A client came to me and told me he was paying $21,204 in rent on a warehouse in Dandenong. A business paying rent is fairly common, but what this client and many others do not realise is that they are able to purchase a property in their Superannuation Fund and lease it to their business. So your landlord is effectively yourself, creating additional personal wealth. With the share market so unpredictable, many people would prefer their superannuation in bricks and mortar, as in many peoples opinion, it is a more consistent investment.
We decided to take a deeper look and established the value of the property would be about $350K and the amount he has in Super (combined with his wife) is approximately $170,000. This would mean the superannuation fund would need to borrow about $200,000 (covering stamp duty and other costs) to buy the property. Under strict provisions a superannuation fund is allowed to borrow, but I won’t bore you with the details of how. We can go into this at a later date. I have assumed 8% interest rates, in case the cost of borrowing increases, with repayments spanning 25 years.
To borrow $200K, (repaying principal and interest) the monthly payments would be $1,543 per month, or $18,516 per annum. The business would still need to pay the rent at the market rate to the fund, so lets say $21,204, and the business would be in the exact same position they were in before. As an overall wealth position, the client is far better off, as this $21,204 is now being paid to the super fund, rather than a third party. If the fund paid the $21,204 straight onto the loan, the loan would be repaid in approximately 20 years. As years go by, rental costs will increase, meaning the loan should be repaid even faster than that.
This is a great way to use your superannuation fund to grow your personal wealth without impacting your personal or business cashflow. Remember, if you run a business and have excess cash, you can contribute it directly to the fund to repay the loan even faster. The benefit of this being you will get a tax deduction for those extra contributions (up to the allowable limits). If you owned the property personally or in a family trust, additional payments against the loan would bring you no tax benefit as you are paying off capital. But making those contributions to pay it off early in the super fund will still leave you and your business in a better tax position.