As a doctor, dentist or vet, purchasing your own rooms through your self-managed super fund can be an attractive option.
Medical, dental and veterinary practices aren’t like other businesses, but many financial institutions tend to treat them like that. For example, for many medical, dental and veterinary professionals, owning their own rooms through a self-managed super fund (SMSF) and leasing the property back to their business is a common strategy. Many major banks, however, have recently decided to discontinue lending to SMSFs for property purchases. At BOQ Specialist, we have a different approach. We know that once a doctor, dentist or vet settles on a practice location, they’re unlikely to move for a long time and if the rental repayments to their SMSF match the loan repayments, that rent becomes something like a forced savings plan - hopefully one with a capital growth upside.
The benefits of SMSF lending
Property remains a savvy investment for owner-occupiers, says BOQ Specialist’s Hugh Lander. “Property is easier to look after,” says Lander. “It’s something where you commonly require less expertise than that needed for investment in equities and it is generally less volatile than equities markets.”
There are three principal benefits of borrowing through your SMSF to buy your own rooms:
- The SMSF is potentially a more tax-effective structure;
- Your business doesn’t tie up capital in the property, because the SMSF is doing so; and
- In the event of financial difficulty, there may be some protection for your SMSF investments.
Of course, there are also possible downsides involved in such a strategy. It means that your SMSF may be overly exposed to a single asset—even if that exposure is to your own business. There are also costs associated with getting a property into the fund. Often, there are also costs for the valuations, loan and conveyancing fees, and potentially stamp duty.
It’s really a decision that needs to be carefully considered based on each individual’s circumstances to better understand whether the benefits outweigh the costs, and that’s a decision to be made with your own financial advisor and accountant. You also need to understand the SIS Act Rules and the tax consequences which your financial advisor and lawyer can assist you with.
How does it work in practice?
How this may look in the real world is: a dentist has $700 000 in her SMSF. She sees some new rooms that have come on the market for $1m and decides that her SMSF should purchase the property using $500 000 of the SMSF’s assets and a $500 000 loan to provide the additional funds for acquisition. Her SMSF will have to borrow using a limited recourse borrowing arrangement (LRBA). LRBAs are specific loan structures which allow super funds to borrow to acquire an asset and limits the security and recourse to the asset purchased. Once purchased, the business will pay rent to the SMSF, which has been determined on a commercial basis to be $1 500 per week, a gross annual yield of 7.8%.
Potentially, any rental income and capital gain on the sale of the property will only be taxed at a maximum rate of 15%.
This opportunity is also appealing for practitioners who already own their own rooms. Under the present legislation, you may be able to sell your rooms to your own SMSF on commercial arm's length terms and hopefully watch the value increase over time as you stay there.
How can BOQ Specialist help?
The tax benefits of this strategy may be greater than just relying on a capital gain on your property, says BOQ Specialist’s Luke Truscott, who hosts regular practice ownership workshops for clients. “Income in the SMSF is taxed at concessional rates. So if your property is positively geared, effectively you are getting investment returns in super at a very reasonable tax rate."
“Another key point of difference with BOQ Specialist is that our lending is designed for doctors, dentists and vets, and the level of gearing we allow them to borrow is higher—up to 90% for an owner-occupied commercial property,” says Truscott, “which allows those with smaller SMSF balances to consider getting into the property market.”
The reason BOQ Specialist can do this? “We’ve seen that medical professionals will often stay in the same rooms for a very long time, so if you sell your practice premises into your SMSF, you could end up with a very tax-effective investment from that point onwards,” Truscott explains.
“We really understand the career trajectories and specific nuances of medical, dental and veterinary professionals. As a result of this, we are able to do things which many general financiers are unable to do. We’ve been doing it for a long time, over 25 years, so we know this market in a deeper way than anyone else.”
Considering purchasing your practice premises through your SMSF? Find out more about our commercial property loans here or speak to one of our finance specialists on 1300 131 141.
Client case studies
Success story: Dr Michael Whyte
When Queensland orthodontist, Dr Michael Whyte, found the property for the practice of his dreams, he built it with the help of his SMSF and BOQ Specialist.
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