Considerations when purchasing an Owner-Operated Clinic via your Self-Managed Super Fund
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Medical Professionals utilise their SMSF to buy their own clinic
Overview
As the healthcare industry continues to evolve, more medical professionals are exploring the idea of owning their clinics. However, purchasing a medical practice involves significant financial commitments, leading many to seek innovative financial strategies to achieve this goal. One particularly advantageous strategy is the utilisation of a Self-Managed Super Fund (SMSF). This approach offers substantial benefits in terms of tax efficiency, asset protection, and control over investments. Below, we explore the benefits and considerations of using an SMSF for purchasing an owner-operated medical clinic.
But First, What is a Self-Managed Super Fund (SMSF)?
A Self-Managed Super Fund is a unique and powerful financial structure that enables individuals to take direct control of their retirement savings. Unlike traditional superannuation funds, where investment decisions are managed by a professional advisory service such as Australian Super, an SMSF allows the members, who are also the trustees, to have complete autonomy over the management and investment of their superannuation funds. This high level of control is one of the primary reasons why SMSFs have become an increasingly popular choice among individuals seeking to actively manage their retirement planning.
Benefits of Purchasing a Clinic via SMSF
1. Tax Advantages
One of the most compelling reasons to consider purchasing a clinic through an SMSF is the significant tax advantages it offers. Rental income generated from the clinic, when owned by the SMSF, is taxed at a concessional rate of 15%. This is substantially lower than the marginal tax rates that would typically apply to an individual’s income, which can be as high as 45%. Additionally, if the property is held within the SMSF for more than 12 months, any capital gains realised upon its sale are taxed at an even lower rate of 10%.
2. Protection of Assets
Another significant benefit of using an SMSF to purchase a clinic is the enhanced protection of assets. Assets held within an SMSF are generally shielded from creditors in the event of bankruptcy or legal disputes. This level of protection is particularly important for medical professionals, who may be more vulnerable to lawsuits and other legal challenges due to the nature of their work. By holding the clinic within the SMSF, the asset is insulated from personal liabilities, providing a secure and protected environment for growing retirement savings.
3. Flexibility in Investments
Unlike traditional superannuation funds, where investment decisions are made by fund managers, an SMSF allows members to have direct control over their investment choices. This means that trustees can decide exactly where and how their retirement savings are invested, including the ability to purchase property such as a medical clinic. This level of control enables medical professionals to align their investment strategy with their expertise and long-term financial goals.
4. Value Appreciation
Like any real estate investment, the value of the clinic property may increase, contributing to the overall growth of the SMSF’s assets. This appreciation can be driven by various factors, such as market trends, improvements in the surrounding area, or enhancements made to the clinic itself. As the property appreciates in value, so does the potential for increased capital gains, which can further boost the retirement savings held within the SMSF. Additionally, because the SMSF can hold the property for many years, it allows for the compounding of these gains, contributing to a stronger financial position upon retirement.
SMSF Finance Funding Considerations
a) Loan Purpose Compliance
The purpose of the loan is also tightly regulated. The lending must comply with the Superannuation Industry (Supervision) Act (SIS Act), which governs SMSFs. Acceptable loan purposes include standard commercial property purchases or refinances, as well as standard residential investment property purchases or refinances. This ensures that the investments made through SMSF are within the legal and regulatory framework established for such funds, thereby protecting the fund’s integrity and the members’ retirement savings.
b) Restrictions on Loan Use
However, there are strict prohibitions on certain uses of SMSF finance. These include cash-out or equity release, which involves extracting cash from the property’s equity, and non-ACL (Australian Credit License) refinancing, which refers to refinancing loans that do not meet certain regulatory standards. Additionally, SMSF finance cannot be used for the construction or significant renovation of a property, nor can it be applied to the purchase of specialized assets, such as service stations. These restrictions are in place to prevent the misuse of SMSF funds and to ensure that investments remain secure and aligned with the long-term goals of the SMSF.
c) Loan Term Specifications
Loan terms also vary depending on the type of investment. For practice premises, the maximum loan term with security is up to 30 years, the same as for commercial investments. In contrast, residential investments have a slightly shorter maximum loan term, capped at 25 years. This differentiation reflects the different levels of risk and expected returns associated with each type of property investment. Understanding these terms is crucial for trustees to ensure that the loan aligns with the SMSF’s overall investment strategy and financial objectives.
d) Loan-to-Value Ratio (LVR) Considerations
The Loan-to-Value Ratio (LVR) is another key consideration. For practice premises, the LVR can be as high as 90% for Class A properties and 70% for Class B properties, reflecting the varying risk profiles of different property types. For commercial investments, the maximum LVR is lower, capped at 60%, to account for the higher risks associated with commercial real estate. Residential investments offer a higher LVR, up to 80%, which is common in the residential property market where properties are generally considered lower risk. These LVR limits help to ensure that the SMSF maintains a prudent level of debt relative to the value of the property.
e) Repayment Terms
Repayment terms are also specified, with both practice premises and residential properties allowing for Principal and Interest (P&I) repayment, with Interest Only options available upon application. This flexibility allows SMSF trustees to choose a repayment plan that best suits their financial situation and cash flow requirements. For commercial investments, the repayment type is similarly P&I, with Interest Only options also available, reflecting the need for flexibility in managing commercial properties within an SMSF.