Suppose you or your business owns commercial business property and you’re thinking of transferring it into your self-managed super fund.
There are two main reasons why doing this makes a lot of sense, especially if you have a reasonable sum of money in your SMSF.
Firstly, the asset would be held in super, meaning the tax on income and capital gains may be less than you or your business would ordinarily pay.
Secondly, if your SMSF purchases some or all of the asset from you or your business, then extracting the cash may help you refresh your own capital structure. For example, you could use it to pay off debt.
Depending on which state your commercial property is in, you can also add a third reason to why this strategy makes sense – stamp duty exemptions or concessions. New South Wales, Queensland, South Australia and Victoria all contain stamp duty concessions when a commercial property is transferred into a super fund.
However, the concession is different in each state. For example, in South Australia it only applies to rural land, while in Victoria it only applies if the property is transferred for nil consideration – that is, it has to be an in-specie contribution (click here for further details on in-specie contributions).
In all states, you should obtain specialist legal advice so that you’re sure you can claim the concession and that you obtain it in the correct way.
There is also a fourth potential reason why this transaction might be attractive to you. Once the asset is held in a super fund it is often difficult for creditors to get hold of the asset to repay any debts. The bankruptcy laws, however, contain various allowances that might allow these transactions to be unwound in some circumstances.
Paying capital gains tax
One important consideration that needs to be factored into these transactions is capital gains tax (CGT), which would be paid by the current owner. As the asset is moving from one owner to another owner, CGT will be payable. This will apply even when an in-specie contribution is made.
You may be eligible for small business CGT concessions that would reduce or even remove the amount of CGT owing. Again, if this applies to you, get some specialist advice about these rules because they’re some of the most complex tax laws around.
Using super gearing is popular when the super fund doesn’t have sufficient money to purchase the property outright. Officially called a limited recourse borrowing arrangement, this can be executed if the commercial property is unencumbered (read, How to use super gearing to buy property and Top 5 super gearing traps.
One feature of super gearing is that anyone can loan money to the super fund and, as a result, many small business property owners are using these provisions to loan money to their SMSF so it can purchase the commercial property. There are a number of essential steps in such transactions, such as the need to make sure the terms of the loan are based on similar ‘arm’s length’ arrangements, for example, the interest rate charged on the loan should be in line with the going market rate, such as that charged by the banks.
Before this type of transaction is contemplated, it’s essential to consider your super fund’s investment strategy. Ask yourself questions like, what is the cash flow impact on the super fund if the property remains vacant for an extended period of time?
Also, it’s normally essential to hold real estate for the medium- to long-term and this must be a key part of your consideration.
And finally, your business will need to formally lease the property from your super fund. Once again, this transaction must be at arm’s length, which means you will have to pay the rent – so make sure you factor in this cash flow impact into your business’ budgets.
- In some cases, you may pay less tax by moving your business property into your SMSF.
- You could access cash in your SMSF by selling the property to your fund.
- Most states offer stamp duty concessions for such transfers.
- You might be eligible for small business CGT concessions.
- Make sure you receive specialist advice about all tax aspects of these transactions.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.