Last week, I ran over the first six steps you need to take when transferring commercial property into your self-managed super fund. If you missed it, you can read How to move a business property into your SMSF on our website.
This week we’re going to look at the things you need to think about when making the transaction, such as in-specie contribution issues, stamp duty considerations, super gearing and the property’s contract for sale.
First things first
But before we get to these specific topics, you’ll need to get a top-notch independent valuation to access the small business capital gains tax (CGT) concessions.
In a nutshell, if you’re going to use these CGT concessions, make sure your independent valuation can be justified. A key component of this is to ensure the valuer has used comparable property types and localities for your property. For example, it’s not good enough to use industrial property values in a nearby suburb as a basis to value small office premises.
Now let’s turn our attention to in-specie contributions. If you’re going to make an in-specie contribution (that is, a contribution of an asset in its present or physical form, such as a property, as opposed to selling it and contributing the cash) make sure you factor in the various contribution caps. Remember, there are special small business CGT concession caps as well as concessional and non-concessional contribution caps for personal or employer contributions.
Once you’ve worked out how you want the fund to acquire the property (direct purchase, in-specie contribution or a mixture of both) you’ll need to consider stamp duty concessions.
Stamp duty by state
At this present point in time, stamp duty concessions exist in Victoria, New South Wales, Queensland and Western Australia. The legislation that enacts these concessions varies between each State.
Even if this legislation were identical, it isn’t prudent to assume that each State Revenue Office (SRO) interprets the provisions exactly the same. Also some SROs seem happier to provide guidance more so than other jurisdictions. For example, the WA SRO doesn’t offer guidance and it will only assess documents formally lodged with it.
NSW property transactions demand that the property be irrevocably ‘ring-fenced’; that is, a stamp duty exemption will only be available if the super fund’s trustee declares that the property will only ever be used to fund the previous owner’s retirement.
To effect this type of transfer, you may need to have your super fund’s trust deed amended. In NSW, it’s possible for the super fund to purchase the property from you and it’s also possible to use super gearing.
A similar rule applies in Victoria; however, the property must transfer for nil consideration, which effectively means you have to make an in-specie contribution with the asset. That is, your super fund can’t buy it from you and super gearing wouldn’t be possible.
Queensland transfers appear to be more problematic because they can only be done if the property can equate to a ‘trust interest’. It’s presently unclear what this term means.
WA property transfers demand a similar process to that which applies in NSW, except the super fund can’t use super gearing. However, it’s rumoured that some solicitors have found a way around this restriction.
The purchase of the property invariably involves an existing lease of the premises. If the sale is made subject to that lease, then it’s sold as a going concern and no GST will be payable.
Borrowing to buy property
You may be interested in using super gearing (that is, taking out a loan to buy an asset) in your fund to finalise the transfer of the property into your fund. If you’re going to use a third party lender, then you need to make sure they understand the nature of the transaction.
If your super gearing loan is provided by a related party (that is, the SMSF is associated with the lender) then Division 7A of the Income Tax Assessment Act 1936 might apply. This Division will deem any unrelated benefits as a dividend, which will make them taxable. If this does apply, then the related party will need to change the interest rate to a benchmark interest rate nominated by the Australian Tax Office (ATO) and the fund will need to repay part of the principal. In these instances, the maximum loan term is 25 years.
Finally, it’s essential the property’s sale documents are appropriately drafted. For example, the contract of sale, requisitions on title, transfer of appropriate insurances, and the notice of sale all need to be handled properly.
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.
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