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Recent years have seen a significant increase of individuals moving their retirement savings from larger retail funds to a self-managed superannuation fund (“SMSF”).
One of the key benefits of moving to an SMSF is that it provides an individual with greater flexibility regarding the types of assets that are funding his or her retirement benefits.
Another advantage of using an SMSF is the ability to move assets already owned by the individual from outside the superannuation environment, into the concessionally taxed environment within the SMSF (with earnings being taxed at a maximum rate of 15% within a complying SMSF). Assets held for longer than 12 months by the SMSF get a discount of one third (that is, taxed at 10%). Also, where the SMSF members start a pension on retirement, the earnings on assets supporting the pension in the SMSF (as well as any capital gains on the sale of those assets) may not be subject to tax at all.
With changes to superannuation legislation over recent years, there has been a rise in the number of real property acquisitions within SMSFs. In certain circumstances, this may include the transfer (or contribution) of business premises that you already own, to your SMSF.
This article explores some of the key tax and superannuation aspects that should be considered before acquiring property within your SMSF.
What property can my SMSF purchase?
Broadly speaking, an SMSF can acquire the following types of property for market value:
— Commercial (business) property; and
— Residential property.
Commercial property, commonly referred to as “business real property”, includes property which is ‘wholly and exclusively’ used in one or more businesses (whether carried on by the SMSF or not).
The property merely needs to be used in ‘a’ business in order to be business real property – so this may include property which you use in your business.
There is no restriction on who the seller of business real property (i.e. it could be an unrelated third party, or even the individual). An added benefit of business real property is that it can be leased to the individual or a related party. However, the lease must be on arm’s length terms.
There are a number of restrictions that should be considered before acquiring residential property in your SMSF.
Unlike business premises, your SMSF cannot acquire a residential property from yourself or a related party. Furthermore, the residential property cannot be leased or rented to you or any related party of the SMSF.
Can I transfer a property I already own into my SMSF?
When it comes to transferring property that you already own, only business real property can be acquired by the SMSF.
Where the business real property is held by individual member or members of the SMSF, the property can be contributed into the SMSF – this is commonly referred to as an “in-specie” contribution. However, a word of warning – each member is subject to annual contribution limits depending on a number of factors (such as age, income levels, and meeting specific working conditions).
For example, it is possible for an individual member who is between the ages of 60 and 65 (and subject to other conditions) to contribute up to $485,000 to superannuation in one financial year. With mum and dad in the SMSF, this could equate to $970,000.
Where the business premises are used in the individual’s own business, the member may also have the opportunity to utilise what is referred to as a “CGT cap” under the small business CGT concessions, contributing up to an additional $1.315 million (for the 2013/14 financial year).
An added bonus of contributing the property into a SMSF is that the property can continue to be leased to a related party of the SMSF, provided it is on commercial terms.
But what if my SMSF needs to borrow?
An SMSF is permitted to borrow but there are a number of very strict rules governing what the borrowed money can be used for. Loans of this nature are commonly referred to as a “limited recourse borrowing arrangement”.
The rules surrounding limited recourse borrowing arrangements are quite complex. In essence, the SMSF can borrow under an instalment warrant arrangement such that the lender has limited recourse over the property (and no other asset of the SMSF). Whilst under the limited recourse borrowing arrangement, the property must be held on trust for the benefit of the SMSF. Additionally, the SMSF must only use the borrowed money for the property alone, and cannot use the borrowing to improve the asset.
An advantage of the limited recourse borrowing arrangement is that the SMSF trustee doesn’t have to borrow from a bank and third party lender. In fact, the SMSF can borrow from a related party of the SMSF.
However, before taking out a limited recourse borrowing within the SMSF, you should consider the costs of doing so – including establishment costs, legal fees, stamp duty considerations, and ensuring that there will be enough superannuation contributions or rent received by the SMSF to fund loan repayments.
Are there any hidden costs or issues?
Usually, stamp duty will be payable on the property acquisition and will vary from state to state.
However, where the property is acquired by the SMSF from an individual (who is a member of the SMSF), concessional rates of stamp duty may apply (for example, in NSW there is a concessional stamp duty rate of $50, subject to meeting a number of conditions).
Importantly, when transferring or selling property you already own into the SMSF, you should consider the tax cost, namely capital gains tax. However, where the premises are used in the member’s business, it may be possible to access small business CGT concessions.
Acquiring property in your SMSF is often a complex transaction, and importantly you should consider both the advantages and costs of doing so. It is strongly recommended that you seek advice of a tax and superannuation professional before entering into the transaction.
For more information on how you can acquire property in your SMSF, speak to a William Buck advisor.