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Should you transfer your business premises into your SMSF?
There can be some solid reasons to consider having the ownership of your business premises in the name of your self-managed superannuation fund (SMSF). To start with, if your business is travelling along steadily, it will provide a steady source of rental income for the SMSF and capital growth. It may also provide a level of stability for you as a business owner by not having a third-party landlord. There are additional advantages that, depending on a business owner’s circumstances, may make transferring commercial property into an SMSF a tempting option.
One of the primary reasons for making such a change is tax. As the asset, which is the business premises, will be held by a superannuation fund, tax on income and capital gains will generally be less than the business would have been liable for. For an SMSF, earnings (which includes rental income) are taxed at 15%. For the business, rent or lease expenses are deductible for the business taxpayer, which pays tax at a rate of 30% (if a corporate). The end result is that the people behind these two entities — the SMSF and the business finish up overall saving 15 cents in the dollar of tax paid.
There are two other positives that can come out of the business making lease payments to the SMSF. These payments are a monetary contribution to the fund that is not counted towards the members’ contribution caps for the year, as they are “investment earnings”. It should be noted that rent must be charged at market rates. The situation can also be further improved once fund members commence pension phase, as tax on earnings then reduces to nil where the asset is supporting the pension.
A second reason to consider having the SMSF buy one’s commercial premises is the resulting transaction will be a monetary fillip for business, and can either refresh its capital situation or perhaps pay down debt.
A third reason, depending on which state the business premise is in, can be stamp duty exemptions or concessions. Many states have legislated to provide stamp duty concessions when a commercial property is transferred into a super fund. However these concessions can vary depending on the state, so advice from this office may be needed.
A fourth potential attraction, which may depend on circumstances, is that assets can be rendered less accessible to creditors once they are held by superannuation funds. There are various allowances made within the bankruptcy laws, for example, that can open these transactions up to being unwound in some circumstances — so the fact that assets are held in an SMSF may not be an iron-clad strategy on the off-chance that creditors could come knocking.
One inflexible requirement, in order to comply with the regulations, is that the property in question must be “business real property” that is used wholly and exclusively for the business. And although the regulations permit purchasing from a related party, the acquisition must be made at fair market value, therefore an independent valuation must be carried out and recorded.
Buying the property must be consistent with the written investment strategy of the SMSF, and the asset must be acquired with the “sole purpose” of providing for the retirement savings of the fund’s members.
An important consideration is the capital gains tax (CGT) implications that will be triggered by moving the property asset from one owner to another, which is the liability of the “seller” of the business premises to the SMSF. In many cases, the business owner may be eligible for the small business CGT concessions, which can significantly reduce or even remove altogether CGT payable on the sale of the property asset. Ask this office for more details.
Another potential benefit that should be mentioned at this point is that once the premises are owned by the SMSF, and over the course of time the members of the fund commence to take a pension, the subsequent sale of the (hopefully increased in value) property will not be subject to CGT if the property supports the pension liability. And even if the property is sold before any pension is commenced, as long as it has been held for at least 12 months the tax on any capital gain is still taxed on a concessional basis in the SMSF at 10%.
It is possible to complete the transfer of property into the hands of an SMSF for “nil consideration” — that is, no money changes hands but the property is transferred as an “in-specie” contribution to the fund. Its value however will then be considered a contribution, and will therefore be included in the annual contribution cap limits. A combination of an exchange of cash plus proportional in-specie transfer is possible. It should also be mentioned that CGT can still apply to in-specie transfers.
If circumstances make it a better option for the SMSF to buy the business premises, but the fund has limited cash resources, it is possible for the SMSF to take out a loan for the property purchase via a limited recourse borrowing arrangement. One essential requirement is that the property must be unencumbered — that is, any existing mortgage must be discharged. Such a loan has the benefit (due to its being of “limited recourse”) of isolating the other assets of the SMSF from the lender should the borrower default.
One option here is that the business is at liberty to provide this loan. One feature of gearing in a super fund is that anyone can lend the money, so many small business property owners are using these provisions to allow their SMSF to borrow money from the business under a limited recourse borrowing arrangement to enable it to buy their commercial property. If you are considering entering into an SMSF borrowing, it is imperative that appropriate advice be obtained at an early stage.
DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).
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Transferring A Business Property Into Your SMSF
The procedure of transferring property between SMSFs may be somewhat complicated. This tutorial will walk you through the process of transferring an existing commercial property into a self-managed super fund (SMSF). In addition, we will offer some advice to make the process run as smoothly as possible.
Continue reading in order to obtain all of the information you want, regardless of whether you intend to transfer a commercial property into your own SMSF or are considering transferring one into the SMSF of another person.
Let's get started!
How To Transfer A Business Property Into Your SMSF
Employers with a self-managed super fund (SMSF) and are searching for a way to safeguard their company's assets may choose to investigate the possibility of moving their business property into their SMSF.
In the event that your firm is subject to legal action or declares bankruptcy, it is a smart idea to protect your assets by putting business property into your self-managed super fund (SMSF).
When it comes to transferring business real property (land and buildings that are used exclusively for the operation of the business) into their SMSFs, members of SMSFs have a number of different alternatives available to them. These options include:
A transfer of ownership of a property from one entity to another in the setting of a commercial property is referred to as an in-species transfer. This is because the ownership of the property is being transferred within the same species. This takes place when the property in question is not turned into cash at any point during the process.
When you transfer property within the same species, the asset's value is counted as a contribution to your SMSF and is subject to the capital gains tax requirements as well as the contribution cap.
Cashing in your SMSF
You are allowed to use the cash that is available in your SMSF to complete a standard cash transaction, such as the purchase of your commercial property at the value that is prevailing in the market.
Prior to this being permitted, the property in question must first be evaluated by a third party that is both impartial and competent. SMSFs that do not have sufficient capital to achieve this can consider utilising their non-concessional contributions cap to settle the outstanding sum if they cannot do so.
Limited recourse borrowing arrangement (LRBA)
If the funds in your SMSF are inadequate to pay the outright purchase of your commercial real estate, you may use an LRBA to make an application for a loan in order to offset the difference.
An LRBA may be secured through the services of a third-party lender, which may include your own company. You have the ability to borrow money from your own company in the form of an LRBA for your SMSF.
Before making an application, you should carefully examine the LRBA's legal complexities. For example, you could be worried about whether your SMSF will be able to afford loan repayment costs on top of any other expenditures it might currently incur, such member pensions, accounting fees, and auditor fees.
CGT retirement concession
The capital gains tax retirement concession enables business owners to defer paying CGT on business assets with an aggregate value of up to $500,000 over the course of their lifetimes.
In order to qualify for this exemption, you must be at least 55 years old; otherwise, there are no criteria. However, if you are younger than 55 years old, you are required to put the money into a retirement account in order to be eligible for the exemption.
If you are under the age of 55 and want to transfer a piece of commercial real estate into your self-managed super fund (SMSF), you may be able to do so without incurring any capital gains tax obligation (up to a maximum of $500,000).
Should You Put Your Company's Assets Into Your SMSF?
There are a number of compelling arguments that may be made in favour of putting the ownership of your commercial property into the hands of a self-managed 401(k) or other type of retirement account (SMSF). To begin, if your company is operating normally, it will be able to offer the SMSF a consistent stream of rental income and contribute to the capital's growth.
It is possible that this will give you, as a business owner, a degree of stability by eliminating the need for a landlord. Depending on the specifics of a company owner's situation, putting commercial property into a self-managed super fund (SMSF) might be an alluring choice to pursue because of the added benefits associated with doing so.
The subject of taxes is one of the key motivating factors behind making such a move. As a result of the fact that the asset, which is the business premises, will be owned by a superannuation fund, the amount of tax on income and capital gains that the company would be required to pay will, in most cases, be lower than it would have been otherwise.
Earnings from an SMSF, including income from rental property , are subject to a tax rate of 15%. On the other hand, rent or lease expenditures are deductible for the business taxpayer, who is subject to a tax rate of thirty percent (if a corporate).
Because of this, the individuals who are responsible for both the SMSF and the business are eligible to get a 15-cent-per-dollar reduction in the amount of tax that they are required to pay.
The fact that the business is making lease payments to the SMSF can result in two further good outcomes. To begin, these payments represent a monetary contribution to the fund; but because they are considered "investment profits," Oneontribution limitations that the members have for the year.
It is essential to keep in mind that the monthly rental rates ought to be established at ma in order to be in accordance with the legislation regarding the market prices. However, when fund members begin the pension phase, the position has the ability to improve, since a tax on earnings will then be lowered to zero where the asset supports the pension. This means that the situation has the potential to become more favourable. When compared to what came before, this is a significant improvement.
The transaction that results from having the SMSF acquire one's commercial premises will be an economic fillip for the company, and it will either be able to refresh its capital situation or maybe pay down debt, which is the second reason to consider having the SMSF buy one's commercial premises.
A third factor may be stamp duty exemptions or concessions, which varies according to the state where the commercial property is located. For example, when a business property is transferred into a super fund , stamp duty discounts may be available in several states thanks to enacted legislation. However, because the specifics of these concessions are subject to change from state to state, it is recommended that you seek guidance from our office.
The fourth potential advantage is that assets held by superannuation funds may be less accessible to creditors; this advantage, however, may be contingent on the particulars of the circumstance.
It is possible that the fact that assets are held in an SMSF is not an ironclad strategy in the event that creditors could come knocking on the door. This is due to the fact that there are various allowances made within the bankruptcy laws, for example, that can open the door for these transactions to be unwound in certain circumstances. Because of these allowances, it's possible that these transactions can be reversed in certain scenarios.
One of the many stringent requirements that must be met to comply with the legislation is that the property in issue be considered " business real property " and be utilised entirely and exclusively for the business. In addition, even if the laws allow purchase from a connected party, the transaction must be conducted at a reasonable price in the market. As a result, there is a requirement for an impartial evaluation to be conducted and documented.
The acquisition of the asset must be done with the "sole purpose" of contributing to the retirement savings of the members of the SMSF, and the purchase of the property must be in accordance with the investment plan that has been outlined in writing by the SMSF.
Considerable thought must be given to the consequences of the capital gains tax (CGT), which come into play whenever an item pertaining to real estate is sold or otherwise transferred to a new owner. These CGT consequences are the responsibility of the SMSF, who are referred to as the "seller" of the company premises.
The owner of the company may, in many instances, be qualified for the small business capital gains tax discounts, which, depending on the circumstances, can greatly decrease or even eliminate the amount of CGT that is owed on the sale of the property asset. But please enquire with this office for further information.
Another potential benefit that ought to be mentioned at this point is that once the SMSF owns the premises, and over time the members of the fund begin to take a pension, the subsequent sale of the property (which has hopefully increased in value) will not be subject to CGT if the property supports the pension liability. This is an advantage that ought to be mentioned because it has the potential to be quite beneficial. Because it possesses the potential to be of great use to the user, this is a benefit that should be brought to their attention.
And even if the property is sold before any pension is formed, as long as it has been kept for at least a year, the tax on any capital gain is still taxed on a concessional basis in the SMSF at the rate of 10 percent. This is the case even if the property is sold before any pension is formed. This remains the case even in the event that the property is sold prior to the establishment of any pension. Therefore, even if the property has only been maintained for the most shortest possible amount of time, this is still the circumstance.
It is possible to complete the transfer of property into the hands of an SMSF for "nil consideration," which implies that no money is exchanged; rather, the property is transferred as a donation "in-specie" to the fund. This is one of the ways in which the transfer of property can be completed. This indicates that the ownership of the property is changed without any kind of monetary transaction taking place. The transfer might also be completed in a number of other ways, but this is one of them.
However, once that occurs, its value will be regarded as a contribution , and it will therefore be included towards the yearly contribution ceiling restrictions. It is feasible to carry out a transaction that involves both the transfer of cash and a proportionate amount of the underlying asset. It is important to note that capital gains tax can still be levied on in-specie transfers even today.
Assume for the moment that the fund has limited access to monetary resources, despite the fact that it has arrived at the conclusion that purchasing the corporate premises would be in the SMSF's best interest. A limited recourse borrowing agreement could be utilised by the SMSF in this case in order to get a loan for the purpose of purchasing the property.
There can't be any liens or encumbrances on the property, which means any existing mortgages have to be paid off. This is one of the most crucial conditions, and it's also one of the most important needs. Additionally, because the loan has "limited recourse," the lender will not be able to access the other assets held by the SMSF in the event that the borrower defaults on the loan. This safeguard prevents the lender from taking possession of these assets and selling them.
There are a few potential outcomes here, one of which is that the company has the authority to grant this loan. Because anyone can lend money to a super fund, which is one of the features of gearing in a super fund, many owners of small businesses that own commercial property are taking advantage of these provisions to enable their self-managed super funds (SMSF) to borrow money from the business in accordance with a limited recourse borrowing arrangement in order to purchase their commercial property.
If you are thinking of withdrawing money from your SMSF, you should seek the advice of an experienced professional as soon as you can.
In-Specie Transfers To Your SMSF Should Be Considered Again, Especially For Employees
When only the franking credits on a parcel of shares in a super fund yield higher returns than cash, the world has entered an other reality that operates like a time warp.
If you purchase any shares of Westpac, you will be eligible for a dividend yield of 6.54 percent that is fully franked. In addition, the franking credit that comes with it is worth an additional 2.8 percent, and if you're a pension fund , you'll receive all of that amount, bringing the total return up to 9.34 percent.
The current rate of return on franking credits is 2.8 percent, which is a significant amount greater than the highest rate of return that can be obtained on cash investments. The annual percentage yield (APY) on "bonus saving" accounts is just slightly higher than 2 percent.
Which, if it hasn't already, ought to get you thinking about the locations of the places where you keep your assets, if it hasn't already. If you are holding them in your own name right now, you should seriously consider moving them into the self-managed super fund that you have already established.
An in-specie transfer is the term given to the process by which you can move some assets from your personal name into the name of your SMSF.
Due to their lack of popularity in recent years, in-species transfers haven't been used nearly as frequently as they once were as a strategy. In addition, Labor's election promise to get rid of franking credits for the vast majority of SMSFs would have rendered many of the benefits of transferring listed shares into a super fund null and useless. This would have been the case if Labor had won the election.
However, up until around five or six years ago, this strategy was utilised on a large scale with great success. The government at the time made the decision to prohibit in-specie transfers because they were concerned that trustees were exploiting a loophole that enabled them to control the price of assets that were transferred into SMSFs. Because of the concerns expressed, this modification was implemented.
Because the government believed that assets were being transferred into super for far less than they were worth, robbing the tax office of capital gains tax revenue , at the time, it essentially called SMSF trustees out as liars and fraudsters. Again, this is because the government believed that assets were being transferred into super for far less than they were worth.
Both of these things contributed to the fact that the attempt to make the opportunity unlawful was ultimately unsuccessful. The complexity of the law was the primary factor, since it was the first reason. The second factor was that share registrars, such as Computershare and Link, started charging fees to assist with transactions, although in the past, these services had been offered at no cost to customers.
The total number of requests that have been made to carry out in-specie transfers so far. Consequently, dropped precipitously as a direct result of this.
It would appear that the thrill is no longer present. However, on the other side, the benefits have not diminished.
What Are In-Specie Transfers?
The process of transferring assets between owners who are related to one another in some way is referred to as a family business transaction. For the purpose of this demonstration, we will limit the transfer of a personal name to the SMSF since we want everything to be as clear as possible. You are giving your self-managed super fund (SMSF) ownership of certain assets, such as five hundred BHP shares, so transferring that ownership from yourself.
It is only possible for a restricted amount of assets. Listed shares , widely held managed funds, commercial or industrial property, or cash-based assets such as bonds and debentures are examples of acceptable investments.
Residential real estate cannot be sold or transferred. There is a blanket prohibition on SMSFs buying or accepting residential property from members or affiliates of the fund, and this includes members of the member's immediate family. Just don't do it.
Why would you do it?
Once an asset is transferred into a superannuation account, it is subject to the tax rates that are applicable to superannuation accounts rather than the personal tax rates. This is the fundamental reason why this is the case.
If you are subject to the maximum marginal tax rate of 47 percent, you will be responsible for a significant amount of additional income tax on any dividends you get. If, on the other hand, the identical asset is held in a superannuation account, the highest tax rate you will pay is fifteen percent; however, there will be no tax charged if the asset is backing a pension fund.
If you sell an asset that is registered in your name and make a profit, you may be subject to a tax on capital gains of up to 23.5 percent of the profit. This tax may be subject to change in the future. If, on the other hand, the asset is held in a super fund, you will be subject to a capital gains tax of up to ten percent when you sell it during the accumulation part of the phase, but you won't be subject to any capital gains tax when you sell it during the pension phase of the phase.
Imagine an asset that you plan to keep for the next ten or twenty years until retirement, during which time it will accrue low-tax returns on income streams and that you will be able to sell after retirement without being subject to any taxation on the gain.
This is the primary advantage of moving assets in-kind into a superannuation account rather than selling them.
It Does Create a CGT Event
A capital gains tax (CGT) event occurs at the time that the asset is transferred from your name to the SMSF. Therefore, when deciding whether or not it is worthwhile, you also need to consider the amount of tax you will be required to pay.
Various strategies may be taken into account in this situation (the full details will have to wait for another day).
You might be able to balance the entire situation if you have significant gains on some shares (like BHP and Macquarie) and losses on others (like Telstra) by moving some gains and losses from one share parcel to another.
If you have shares of stock that are currently yielding little profit or loss but you anticipate significant returns in the future, it's likely that now is the optimum time to transfer those shares.
Transfers Are Contributions
The value of the transfer itself is considered a contribution; specifically, it can be categorised as a concessional contribution (CC) or a non-concessional contribution (NCC).
As a result, you will have to factor it into the plans you have made to accommodate those limits.
If you are not currently making use of your maximum credit card limit of $25,000, then the in-kind transfer could be utilised in its entirety or in part for the purpose that was described above. (An additional advantage of this situation is that if you do have a CGT event outside of super on the "sale" of the assets, the in-specie payment might be a tax credit, and there is also the prospect of a concessional contribution, which could assist in lowering that.)
In that instance, your company has made payments to you totalling $15,000 regarding your super guarantee (SG), leaving you with a credit card limit of only $10,000. As a result, you have the ability to make an in-specie transfer into your SMSF of shares worth $10,000.
If you so wished, you could make more than that specified number of transfers. This option is available to you. For instance, you might label the first ten thousand dollars as CCs and the remaining money as NCCs. You could even designate the entire amount as NCCs.
One of the key reasons why this strategy needs to restore some of its former relevance is due to the tremendous improvement that has been done in this area for workers over the past few years in terms of their contributions.
Because the 10 percent limit is no longer in effect, it is now possible for all workers to use in-kind transfers to make concessional contributions . This was not previously the case.
Before the start of July in 2017, if you earned more than 10 percent of your income as an employee, you were ineligible to make personal contributions that were tax deductible. Because of this, in-kind transfers such as CCs were not an option for employees who earned more than the specified percentage of their total income from their employment.
Make that payment in lieu of cash for ten thousand dollars' worth of BHP shares. In most cases, you will be able to claim a tax deduction for the expense (if you qualify to make personal deductible contributions). In this context, additional regulations govern the deductibility of personal donations. Please refer to this column (22/11/17) for further information.
You can use the "pull-forward" provisions, which let you contribute up to $300,000 to spend your limit in the current year plus the next two financial years, if you desire to use in-specie transfers to make NCCs. These limits are set at $100,000 per year. Additionally, there are limitations of up to $100,000 per year if you want to employ in-specie transfers to create NCCs. In order to prevent system abuse, you will also be limited to $100,000 each year if you want to use in-specie transfers to build NCCs.
Costs and buy/sell spread risk
There is typically some sort of fee associated with the situation. In order to finalise the transfer, the majority of the primary shareholder registries, such as Computershare and Link, will charge a fee that falls somewhere between $50 and $60. Because of this, the purchase of smaller chunks of shares might not seem like as appealing of an option.
Some people might wonder why they shouldn't just sell the asset, put the money in their retirement account , and then buy the item all over again.
You can. However, during that time, you would be unable to engage in any kind of trading, which would force you to stay away from the market for at least a week.
It would be fantastic news if, during the course of that time period, the value of the shares decreased. On the other hand, if they move up, then the $55 that was spent on the transfer fee would have been a very good investment. This would have been the case if the transfer was successful.
Business Real Property
An enormous subject all on its own, which we'll get to another time. When certain conditions are met, the transfer of commercial property to an SMSF can make incredible financial sense.
Because the 10 percent condition that required their utilisation has been removed, in-specie transfers should start to get more interest as a strategy once again. This is especially true in view of the fact that their utilisation was previously compulsory.
And with recent growth slowdowns, particularly on the Australian stock market , this might be the ideal moment to familiarise yourself with the market.
The information contained in this publication is primarily of a general nature and does not provide readers with individualised recommendations regarding their finances or investments. It does not take into account the particular objectives you have or the circumstances in which you find yourself.
No one should take any action based on this content before first seeking out the counsel of a professionally competent property adviser who is adequately qualified, and then sticking to that counsel.
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Who is eligible for SMSF?
Qualifying as an SMSF
Be a superannuation fund; Have fewer than five members; and . Have each member as either an individual trustee of the fund or the director of a corporate trustee (and vice versa). Somewhat surprisingly, only about 30 per cent of SMSFs have corporate trustees.
How much money do you need for a SMSF?
There's no minimum balance required to set up an SMSF, but it usually becomes cost-effective once you have a balance of $250,000 or more . You will need to pay the annual supervisory levy to the ATO and arrange for an accountant to prepare the financial statements and tax return, and conduct an independent audit.
What are the rules for SMSF?
An SMSF must have four or less members . Being a member of the fund also means you must be a trustee. You can have a company as a trustee but all members must be directors. All trustees are responsible for the running of the fund and should act in the best interests of all fund members when making decisions.
Transferring Your Owner Occupied Commercial Property to SMSF
One of the more effective long-term wealth creation, tax minimisation and asset protection strategies, can be transferring your owner-occupied commercial property to your self-managed superannuation fund (SMSF). But what if you purchased your property some time ago (outside of Super) and you would like to move it in there now? T his is possible, but there are a few things you need to considered to determine if this is a strategy that could work for you:
As the property will be purchased by the SMSF, will it be possible for you to get enough funds into the Superfund to facilitate the purchase?
Will the SMSF need to borrow? Banks will allow the SMSF to borrow 60% – 70% on a non-recourse borrowing arrangement to facilitate the transaction including any costs; all of which need to be paid by the SMSF.
Will stamp duty be payable on the transfer? There are circumstances where the transaction can be assessed for nominal stamp duty ($20). You might need to seek legal advice to review your situation.
Will there be a capital gain on the property and if so, how will that be treated? Capital gains tax can be avoided in many circumstances.
Will surplus funds come out of the SMSF and if so, how can the funds most effectively be used to improve your financial position? In many cases funds come out of the SMSF and can be used to reduce personal debts.
What impact will the transfer have on your cash-flow position? What are the taxation benefits and will the transfer enable you to repay the debt in a shorter amount of time? There are structures that can improve your personal cash flow whilst paying down your debt faster.
If you would like more information, speak with a finance broker experienced in facilitating transferring commercial property into SMSF for more information regarding finance structures. A good finance broker will also be able to put you touch with a Financial Planner/Tax Adviser that can assist you.
At Westminster National, we have experienced brokers who can help you not only to review your current loans but also to transfer commercial property to SMSF. Contact us today to find out more!
Transferring Your Property To Your Super Fund
Often superannuation can be a great structure for people to hold their property in. It is usually a lower tax environment and offers protection against bankruptcy. But sometimes, you may feel that a property that you own in your own name would be better off in your SMSF. In that case, what do you need to consider if you would like to move the property into your SMSF?
Only certain properties can be transferred to your super fund. Usually, only a property that is wholly and exclusively used in one or more businesses is able to be transferred to your own SMSF. For example, if you were in possession of a residential rental property, you would not be able to move it into your super fund. A shop on the other hand could be transferred into a super fund.
Transferring an eligible property to an SMSF is considered a sale, which means that capital gains tax (CGT) may apply. You need to consider what your CGT obligations may be and if you are entitled to any small business concessions to reduce that gain.
You will also need to consider whether stamp duty is applicable to the property. Some states (Victoria, NSW & WA) offer concessions on transferring property from your own name to your SMSF in certain circumstances. And of course, SA has no stamp duty on commercial property.
You may also need to undertake financial modelling to confirm that you would be financially better off transferring your property to your SMSF. If this is something that you would like to do, please contact us so that we can assist you.
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Transferring your commercial property into SMSF
28 November 2019
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Q&A: Can you transfer an investment property into an SMSF?
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Q: Can you transfer an investment property currently in a discretionary family trust into your SMSF? How would you do that? What are the pros and cons for such a move?
A: The best answer I can give you is be careful.
Remember that it is not an asset that you own. It’s owned by the trust. Even if you’re a beneficiary of the family trust, the trustee can give you income, it can assign you income, but you don’t own the assets. The trust owns the assets. So if you move an investment property from the Garth discretionary trust to the Garth SMSF, Garth hasn’t made that contribution. The trust has. And it’s arguably going to be a concessional contribution taxed at 15%. So if it’s a million dollar investment property, you just hit $150,000 tax liability, arguably.
What could happen is that the family trust could distribute an asset. It could pay out an asset, distribute it to the individual, and then the individual could make a contribution, an in specie contribution. But if it’s an investment residential property, you can’t do it because SMSFs aren’t allowed to acquire from a related party residential property [that does not meet the requirements to be business real property] . Even if it’s from the trust, it’s a related trust. It’s controlled by you and your family.
So it would have to be an investment commercial property [or otherwise meet the requirements to be business real property], of course, for that to work. But if it was, let’s just jump to the conclusion that it is an allowed asset, it’s a commercial property, you would have to do a distribution to the members, stamp duty, capital gains tax, because you’ve changed beneficial ownership.
And then the individual will have to transfer it up to the SMSF. Again, stamp duty, capital gains tax. So it’s expensive to do it. Before you do that, please get some specific tax advice around that. Pros and cons are huge for both. If it’s a residential property, don’t take it any further because you won’t be allowed to do it.
This Q&A is taken from one of SuperGuide’s regular members Q&A webinars .
About the author
Garth has worked in the Australian Superannuation industry for over 20 years with a specific focus on self-managed super funds. He provides ongoing support and training to individuals as well as to professionals working in the superannuation area, including advisers, accountants and lawyers. He is a regular contributor to industry publications and to the leading professional bodies including Chartered Accountants Australia & New Zealand (CA ANZ).
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Transferring a business property into your SMSF
Under a limited set of circumstances, it is possible for SMSF members to make non-cash contributions, also known as in-specie contributions, to their funds. One way in which this can be done involves the transfer of a ‘business real property’ to an SMSF.
Using a combination of the non-concessional contributions cap and the CGT retirement exemption, it can be possible for business owners to transfer their commercial property into their SMSF with a number of tax advantages.
For a property to be considered a ‘business real property’ it must be used wholly and exclusively for business purposes. In order to be transferred into the SMSF, it must be unencumbered, meaning that it cannot have any outstanding debts or loans associated with it. If you are interested in transferring a ‘business real property’ with outstanding debt, you may be able to do so provided that you settle the debt before you transfer the property. The commercial property may be a shop, industrial space or a farm, and there are some slight exemptions to the exclusive business use specification for farms.
The property must first be valued by an independent and appropriately qualified party. The transfer of the property must be recorded at market value and will also trigger a CGT event. If your SMSF has enough liquid capital to purchase the property outright, then this is allowable. However, as many SMSFs do not have sufficient capital to do this, it may be possible for you to use your non-concessional contributions cap to cover the outstanding balance. For example, if your property is valued at $500 000, and your SMSF has $300 000 cash, you may be able to transfer the property, and count the remaining $200 000 as part of your non-concessional contributions cap. It is also possible for your SMSF to use an LRBA to borrow money to acquire the property. However, this has complex compliance requirements, and it is advisable to seek legal advice if you wish to pursue this course of action.
Using the CGT retirement concession
The CGT retirement concession allows business owners exemption from CGT on business assets up to the value of $500 000 over a lifetime. If you are over 55, there are no associated conditions, however, if you are under 55 then you must place the money into a superannuation fund to receive the exemption. This means that if you are under 55 and wishing to transfer a ‘business real property’ into your SMSF, you can potentially do so without incurring any CGT liability (up to the value of $500 000).
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Contributions - In Specie Transfers
transfer of an asset from a member to the smsf.
Members of an SMSF can make contributions in cash. It is also possible for Members to make contributions of assets directly into the SMSF instead of cash. These types of contributions are called "in specie" contributions. Only certain assets listed in the Super Laws can be transferred in specie by a Member. If the asset is not specifically listed in the Super Laws, it may not comply with super regulations to transfer an asset owned by a Member into the SMSF.
Assets that can be transferred In Specie
The only assets currently allowed to be transferred to an SMSF from a Member (or an associate of an SMSF Member by blood or marriage or entity controlled by a Member) are as follows
- ASX Listed Securities
- Widely Held Managed Funds
- Business or Commercial Property
- Cash Based investments such as Bonds and Debentures.
Whilst an SMSF can purchase Residential Property from a person who is not a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member), an SMSF cannot purchase Residential Property from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) even if the purchase is at market value.
Transferring ASX Listed Securities
To transfer ASX Listed Securities from your personal name to the name of the SMSF an Off Market Transfer Form must be completed and lodged. In the Off Market Transfer you will need to list the Purchaser of the Shares as your SMSF. You will not need to specifically state which Member the shares are being allocated to. This is done as part of the annual Checklist Process detailed below . The process to complete an Off Market Transfer is discussed in detail here .
Transferring Widely Held Managed Funds
To transfer Widely Held Managed Funds (e.g. MLC, AMP, Platinum etc.) from your personal name to the name of the SMSF, an Off Market Transfer Form must be completed and lodged with the Fund Manager directly. A generic Off Market Transfer Form can be found here . In the Off Market Transfer you will need to list the Purchaser of the Managed Funds as your SMSF. You will not need to specifically state which Member they are being allocated to. This is done as part of the annual Checklist Process detailed below .
Transferring Commercial Property
To transfer Commercial Property from your personal name to the name of the SMSF, you will need to execute a Contract of Sale and will need a solicitor to prepare the required documentation including lodging the transfer documents with the relevant State Revenue Office. You will need to list the Purchaser of the Commercial Property as your SMSF. You will not need to specifically state which Member the Commercial Property is being allocated to. This is done as part of the annual Checklist Process detailed below .
Transferring Residential Property
You must remember that it does not comply with super regulations to transfer Residential Property from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member). So you should never contemplate this transfer as it will lead to significant penalties.
Transfers must be at Market Value
All In Specie Transfers of assets from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) must be transferred at Market Value. The Market Value must be clearly detailed in the Off Market Transfer Form prepared for the transfer of ASX Listed Securities or Managed Funds or in the event of Commercial Property in the Transfer Documentation. To the extent that the asset is transferred to the SMSF at a value under Market Value the transfer will be "deemed" to be at Market Value.
Treatment of In Specie Transfers within the SMSF
When you make an In Specie Transfer to an SMSF, it can be treated in one of two ways when it is received by the SMSF. It can be treated as either a Contribution or alternatively as an Asset Purchase by the SMSF. It is totally your choice which option is chosen! Each is discussed below.
Treating In Specie Transfer as a Contribution
As detailed above in the documentation to effect the asset transfer you will need to list the purchaser of the asset as your SMSF. At the end of the Financial Year we will forward to you a Checklist detailing if you wish the transfer to be treated as a contribution or an asset sale. If you elect the transfer to be treated as a contribution you will need to elect which Member will be allocated the contribution and the type of the contribution to be allocated, namely Non Concessional or Concessional. Once the election is made, the value of the asset (not the asset itself) will be allocated to the Member when preparing the annual compliance documents for the SMSF. The Eligibility Criteria and Contribution Limits will need to be carefully borne in mind under this option.
Treating In Specie Transfer as an Asset Sale
As detailed above in the documentation to effect the asset transfer you will need to list the purchaser of the asset as your SMSF. At the time of the transfer you can elect that the transfer be treated as a sale and the SMSF pays you the Market Value of the asset being transferred. In this case we will not record the asset transfer as a contribution. Under this scenario the value of the asset (not the asset itself) will be allocated on a proportional basis to each Member based on that Member's existing ownership of the SMSF at the time of the transfer, when preparing the annual compliance documents for the SMSF. ESUPERFUND does not provide financial advice. You should obtain your own independent financial and taxation advice about whether this course of action is appropriate for your circumstances.
Potential Issue 1: Assets Preserved until Retirement
Whilst there can be tax savings by transferring assets from your personal name to your SMSF, there are several catches which must be carefully considered. The first is that transferring assets to your SMSF "traps" the assets in the SMSF until you are at your preservation age. So whilst it may be tax advantageous to transfer assets to your SMSF you must ensure that it is money you will not require until at your preservation age.
Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.
Potential Issue 2: Stamp Duty
Stamp Duty may be payable on Managed Funds and Commercial Property Transfers and should be carefully considered prior to transferring these assets to your SMSF. Accordingly you will need to contact the State Revenue Office or your solicitor to discuss the Stamp Duty implications associated with any transfer where it involves Managed Funds or Commercial Property. There is no stamp duty on share transfers.
Potential Issue 3: Capital Gains Tax
Because there is a change in ownership of the asset transferred (from you to the SMSF), the asset transferred is deemed to have been sold resulting in possible CGT implications on the transfer namely:
If the asset has been held for less than 12 months, any capital gain on the asset transferred will be realised and the full amount of the capital gain will be included in your personal taxable income.
If the asset has been held for more than 12 months, any capital gain on the asset transferred will be realised and 50% of the capital gain will be included in your personal taxable income.
Any capital loss on the asset transferred will be realised and will be included in your personal taxable income.
This means that to the extent there is a capital gain on the transfer of assets into your SMSF the capital gains tax cost needs to be considered. In some cases shares will have been held for many years and the capital gains will be significant. However this does not automatically mean that you should avoid this for fear of paying some tax now.
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It Depends – Transferring property to an SMSF
- Topics: Professional advisers , Superannuation
In this edition of ‘It depends’, senior associate Steven Jell talks about transferring assets to an SMSF.
Hi, during this edition of It Depends, we’re going to talk about transferring assets to an SMSF.
What are contributions?
Contributions are an amount transferred to an SMSF by a member or on behalf of a member. The considerations regarding contributions are relevant when we’re looking at transferring assets to an SMSF as the SMSF will need to treat the asset transferred as a contribution. There is a separate edition of It Depends on contributions, please have a look at it.
Can I transfer an asset to my SMSF as a contribution?
It depends. The transfer of an asset into an SMSF as compared to the transfer of cash is referred to as an ‘in specie transfer’. The value of the fund increases by the value of the asset transferred, and the asset is treated as a contribution for the member whose member balance has also grown.
Who can transfer assets?
Contributions can be made by a member or by someone else on their behalf. The super rules restrict the types of assets that can be transferred into an SMSF and also the way in which those assets are accounted for. Most commonly it’s the individual member who’s looking to transfer an asset that they own into their own SMSF. This creates some compliance issues for the fund, because each member will be treated as a related party of the fund and the SMSF has some restrictions on the assets that it can acquire from a related party.
What types of assets can be transferred?
Broadly, there are three types of assets that can be transferred to an SMSF. We’ve got listed securities such as ASX listed shares, managed funds, which are a type of investment where the member is one of a large number of investors or real estate used in a business such as commercial property.
What do I need to do before transferring an asset in specie?
So, it depends and we need to look at the individual circumstances as well as the asset that we’re looking to transfer in. So, first, look at the trust deed. Does it allow in specie transfers? Does it require a particular process which must be followed? The asset itself must be transferred at market value. So, when we’re looking at market value transfers, we need to consider well, does the member have sufficient space in their contributions limits to allow them to have the allocation of that asset to their member balance? If the individual member is transferring it from their personal name, then we need to look at the tax consequences associated with them disposing of that asset personally, as it will likely be treated as a tax event for CGT purposes. If we’re transferring real estate, we need to consider the transfer duty consequences of transferring the real estate into the SMSF as a beneficial ownership of the asset will have changed. What documents do we need to prepare? And they will depend upon the circumstances associated with the individual transaction. The key thing to look at in all these situations is, once the asset is in the fund, it may be very difficult to get it back out. So, we need to consider whether the members want to retain that asset in the SMSF for an extended period of time.
If you or one of your clients have any questions, please feel free to reach out and contact me or one of the team. Thank you for watching this edition of It depends .
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- --> Traps when transferring a business premises into an SMSF -->
Traps when transferring a business premises into an SMSF
Transferring a business premises to an SMSF definitely has its advantages but understanding the negatives is critical to your client's success.
While the merits of SMSFs holding direct property investment continue to be debated, most agree there are real benefits in business owners holding the property of the business premises as an investment in a SMSF.
Transferring the business premises, referred to as “real business property”, into a SMSF is a good way of extracting funds out of the business, in a tax effective way. It means the business owner is paying rent to the super fund, rather than to some third-party landlord. It is one of the few ways to utilise superannuation investments in the business.
But in the rush to transfer the business property to the SMSF, investment fundamentals should not be forgotten. A key consideration is that holding the property in the SMSF has to make sense from an investment, tax and income perspective, and not simply because property is viewed as the hot asset class of the moment.
If the business premise is the only asset of the superannuation fund, questions should be asked as to whether it is the best option. There are a number of problems in having a large portion of superannuation savings tied up in one asset. Having one dominant asset class brings increased risk to any superannuation portfolio. And having only one asset in that asset class exacerbates it further. Additionally, property is usually illiquid, which may cause issues for the SMSF, particularly if any of the fund members are in pension phase and also need regular income from the fund. Nevertheless, transferring the business property is a popular option, often for good reason.
What can be transferred? It is important to understand what constitutes business real property. It can be a factory, or a shop or an office. But it can’t generally be a house, and it is not normally vacant land either.
The use of the property is another key consideration before any SMSF transfer can take place. The property must be used solely for business. This means it cannot be part commercial and part residential. If this is the case, the titles will need to be split. The resulting transfer of property to the SMSF can only be that portion of the property that is on the commercial title.
Importantly, business real property cannot include company title or shares in a company that solely owns the business property. It also does not include the business property’s furniture or non-fixtures.
The tax office definition for business real property is land and buildings used wholly and exclusively in a business.
Once the suitability of the property is established, the transfer can take place. The business property can be transferred in specie, that is, as a contribution in the form of an asset other than money or cash, and be treated as a contribution by the transferor. Alternatively, the fund can acquire the premises by cash, whether it is cash already in the fund, or by borrowing.
While tax office rules say that super funds generally must not intentionally acquire assets from related parties of your fund, business real property is a significant exception to this rule. Pros The biggest benefit of this strategy is that the business receives a tax deduction for the rent paid to its super fund. The rent received by the SMSF is taxed at the low superannuation rate of 15 per cent (or zero if fund is in pension phase).
Significantly, the rent received by the SMSF is not subject to a cap in the way that superannuation fund contributions are. This provides an additional, tax-effective means of building up retirement savings.
As well, when there are significant assets in the SMSF, there is the advantage that the business is able to use the member’s retirement funds to support the business without having to use debt.
An additional advantage is the possibility that the transferor (be it the business entity or the fund member) can access the small business capital gains tax (CGT) concessions with the transfer of the business premises to the super fund. This may have the effect of reducing or eliminating any CGT liability on the transfer or sale of the business premises to the super fund.
Finally, it may be possible to receive stamp duty concessions on the transfer where, depending on the state or territory, only a nominal duty is imposed on the transfer, for transfers between an individual and a super fund.
Cons The biggest disadvantage of this strategy, however, is that depending on what other assets are available, it can reduce the diversification and liquidity of the fund.
These liquidity issues can be long-ranging and difficult to foresee, and can be triggered by the death of a fund member. For example, if two business partners are in a SMSF that was set up for the express purpose of owning the business property and one of them dies, the business property may have to be sold to pay out death benefits.
There is also the risk of having one’s retirement benefits linked to one’s business. It may be that the business premises may not be the best type of investment to hold in the fund, as commercial properties can have lower rates of growth than residential properties or other asset classes. Also, if the business falls behind in rental payments and the fund takes no action to recover the shortfall, then the fund’s compliance status is at risk because the fund is effectively providing financial assistance to a related party, which is a breach of the SMSF investment rules.
There is no question that property investment can reward SMSF investors with capital growth and steady rental income. The decision whether to transfer the business property into the SMSF is a matter of determining not only the investment merits of the business real property in question, but also the current and future needs of the members of the SMSF.
Andrew Yee, director, superannuation, HLB Mann Judd Sydney.
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