Could your medical practice pay rent into your retirement fund?

For most healthcare practices, rent is a permanent line item. It funds someone else’s asset, month after month, with nothing to show for it once the lease ends. A growing number of practice owners are asking whether that “dead money” could be turned into an asset. This typically involves creating a self-managed super fund (SMSF), which buys the commercial property, meaning the practice pays rent to the fund instead of to an unrelated landlord.

Australia’s 653,000-plus SMSFs now hold more than $1 trillion in assets, with 17.5% of that in property, so this isn’t a fringe idea. Done well, it’s a genuinely useful strategy: the practice gets more control over its premises, and the fund builds a retirement asset out of an expense the business was already carrying.

Done without proper advice, it can go wrong in ways a standard commercial lease never would.

How the arrangement works

An SMSF can purchase commercial premises such as a medical suite, dental clinic or consulting rooms, and lease them to a member’s healthcare business, provided the property qualifies as business real property (used wholly and exclusively for business purposes) and the arrangement meets the relevant rules.

Two of those rules carry most of the weight:

1. Dealings between the fund and the practice must sit at arm’s length: rent and lease terms need to track the commercial market rather than whatever suits the owner’s cash flow that quarter.
2. The fund has to pass the sole-purpose test. It exists to provide retirement benefits, not to serve as a convenient source of finance for the business that happens to occupy its only asset.

Turning rent into a retirement asset

This is the part of the strategy that gets the most attention, for good reason. Instead of paying an unrelated landlord, the practice pays commercial rent to its own SMSF. The fund receives that income and owns the underlying property, which hopefully appreciates over time.

That does not make the rent free. The business still needs to meet its lease obligations, while the fund must pay costs such as loan repayments, insurance, rates, maintenance and administration. But it does mean a major recurring expense is working toward the owner’s long-term retirement strategy instead of someone else’s.

Ownership also brings welcome certainty. A practice that controls its premises is no longer exposed to a landlord raising the rent or selling the premises. That matters more in healthcare than in most industries. Relocating a practice is costly and can disrupt relationships with both patients and referrers.

The tax treatment rewards getting it right

Complying SMSFs generally pay tax at concessional superannuation rates: 15% on concessional contributions, and investment earnings supporting retirement-phase pensions may qualify as exempt income. A complying fund may also receive a one-third discount on eligible capital gains after holding an asset for at least 12 months.

Those settings can make commercial property genuinely attractive inside super, provided every transaction meets the rules along the way. Get the arm’s-length test wrong and non-arm’s-length income can attract far less favourable treatment. Capital losses inside the fund can’t be offset against the owner’s personal or business income either. It is essential that the property purchase is a sound investment in its own right, not just a tax-effective one.

Borrowing considerations

Many SMSFs need finance to buy commercial property, and that usually means a limited recourse borrowing arrangement, with the loan structured around a single asset and the property typically held through a separate holding trust.

These loans are more involved than a standard commercial facility. Interest rates and fees can run higher, and there are additional accounting, audit and legal costs to budget for. Incorrectly prepared paperwork can be difficult to amend later, sometimes leaving selling the asset as the cleanest way out. Best to get the documentation right from the outset.

Cash flow deserves close attention too. The fund needs to cover repayments and property expenses even if the practice hits a quiet patch, the premises sit vacant for a period, or members reduce their contributions. Eventually, it will need enough liquidity to pay pensions without being forced into a sale at the wrong time.

Then there’s the fact that all your eggs are concentrated in the same basket. Often, the fund’s main asset is the building its own members’ business occupies. The owner’s business income, retirement savings and property exposure are all tied to the performance of the same enterprise.

Set up for success

Buying a practice’s premises through an SMSF makes the owner a commercial tenant, property investor and trustee at once, carrying full legal responsibility for the fund’s compliance even when accountants, advisers or lawyers are involved.

ASIC’s most recent review of SMSF establishment advice found that 62% of client files inspected did not meet the best interests duty, and 27% carried a real risk of client detriment. That’s reason enough to seek independent professional advice rather than rely on a sales pitch attached to a property listing.

Properly structured, the strategy may strengthen both the practice and the owner’s retirement position. Getting there takes rigorous modelling and expert, impartial advice.