What you can and can’t do with property in your SMSF

SMSF technical expert and columnist for The Australian newspaper
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Sometimes our subscribers come up with questions that are real zingers, and answering them can teach us all a thing or two about how the super and other laws interact.

Take the following questions, asked by a new subscriber to the Switzer Super Report.

We’ve been getting conflicting answers to our questions so we hope you can help.

My partner and I are aged 51 and 52 years respectively.  We’re contemplating buying a residential property in our SMSF, and will operate it as an investment property until retirement.

When we retire, we would like to sell our current home and live in this SMSF property.

Can we transfer the property into our names upon retirement without any tax implications, and if so, will stamp duty be applicable on the transfer?

So far, we’ve been given the easy answer that stamp duty would apply (being a transfer between two different entities), but no-one can direct us to a specific ruling or SMSF regulation etc.  However we think stamp duty wouldn’t apply because it shouldn’t be any different to selling a property we personally own.

If by chance stamp duty is applicable, could we just leave it in our SMSF, live in it until judgement day, and pass it on to our beneficiaries without any tax or duty liabilities?

I’ll deal with the myriad of issues raised step by step.

1. Purchasing property within the SMSF

I’ll assume our readers are knowledgeable and realistic property investors.  For what it’s worth, it’s essential that your SMSF’s investment strategy reflects the ownership of this asset.

If you want your super fund to borrow money to purchase the property, then you’ll most likely be using a Limited Recourse Borrowing Arrangement (LRBA).

These structures are quite complex and it’s often wise to take some good advice to ensure you don’t inadvertently muck them up and face severe penalties.

There are other options available if you would like to borrow money and purchase your SMSF property.  A good example of this is the 13.22 Unit Trust structure.  You can find out more at this article. Similar to LRBA transactions, I’d encourage you to take some good advice about this investment option.

If the property your super fund purchases is a residential property, then it can’t currently be owned by you, any of your relatives or any entity (for example, company or trust) that you, or your relatives, own or control.  This includes entities the super laws deem you or your relatives control.

2. Use of the property

The subscriber mentioned that the prospective property would be rented out like any residential investment property.

The SMSF trustee and their relatives can not rent the property from their super fund – it must be rented to an external party.  This includes the period of time when you’re retired.

When you rent it out, the super fund needs to receive at least the market rent.  It can receive more, but not less.

3. Transaction costs on transfer of property after retirement

There are two big costs on the change in ownership of real estate – stamp duty and capital gains tax (CGT).

Stamp duty is a State and Territory tax and each jurisdiction applies rules independently. There are no Commonwealth superannuation laws dealing with the imposition or collection of stamp duty.

At present, there are some stamp duty concessions available for a limited range of property transactions in most States and Territories.  However, none of these concessions apply to the transaction our subscriber potentially had in mind – namely the transfer of the property owned by the super fund to their personal names on retirement.

When the ownership of the asset changes from the super fund to your personal names then, at present, this would incur full stamp duty throughout Australia. This stamp duty would have to be paid by the individual as you would be deemed to be the purchaser.

The next issue is CGT.  When a super fund sells any asset, the gain will be taxed at 0% if the asset is being used to pay a pension or effectively 10% if the assets aren’t being used for pensions and the property has been owned for more than 12 months.  If there is a mix of pension and non-pension assets, and the fund has unsegregated pension accounts, then the gain will be pro-rated between the 0% rate and the 10% rate (an actuary determines the pro-rata number).

The bottom line – the amount of CGT payable when the asset transfers from the super fund to your name will depend on whether or not your fund is paying pensions.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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