Julie Dolan examines the advantages of owning business property inside an SMSF.
Do you have a commercial property from which you operate your business? It may be beneficial for you to consider transferring it to your SMSF. How does this work, you ask?
Firstly, it is important to understand the superannuation laws and how they apply. Simplistically, business real property is defined as any freehold or leasehold interest in land used wholly and exclusively in one or more businesses. It does not have to be used in your own business, nor does it have to be zoned commercial, rather it is based on the usage test of wholly and exclusively. An SMSF can acquire business real property from related parties without breaching the acquisition of assets from related party rule.
Once the property is owned by the SMSF, it can lease it back to the business without the fund breaching the in-house asset rules. The acquisition or transfer and the lease agreement all need to be on arm’s-length terms. These invaluable concessions effectively provide for the ownership of your property by your SMSF and then the fund can lease it back to the business you operate. The rental income and any future capital gains are then taxed at the concessional tax rates available to superannuation. It is a great way to accumulate funds within your SMSF for your retirement.
Mary and Bill, both aged 61, own a warehouse they lease to their company that operates an importing business. Based on a current valuation, the property is worth $920,000. They bought it six years ago for $600,000. The property generates a net rental yearly return of $46,000, which is at market rates. There are no borrowings on the property. Mary and Bill transfer the property into their SMSF as an in-specie non-concessional contribution.
They have not used the bring-forward rule, so have the ability to contribute up to their non-concessional contribution cap of $540,000 each.
- Mary and Bill’s marginal tax rate is 39 per cent (including Medicare levy). The SMSF pays tax at 15 per cent on income in accumulation phase, therefore, there is an annual tax savings on net rental income of $11,040. Better still, if Mary and Bill commenced a transition-to-retirement income stream (TRIS), the rental income would be taxed at zero, representing an annual tax saving of $17,940. This rental income could then supplement the income stream payments, which would be tax-free in the hands of Mary and Bill as they are both over the age of 60.
- On eventual sale of the property, any net capital gains would also be tax-free.
- There are asset protection benefits in having the asset owned by the fund (with a corporate trustee) as compared to being owned personally.
- Estate planning benefits. Depending on Mary and Bill’s succession planning for their business, it can be structured so the property can stay in the fund for the future benefit of their family.
- Significant increase to Mary and Bill’s retirement savings within their SMSF.
- Provides access to an alternative asset class, with the SMSF aligned to the investment strategy of the fund.
Points to consider
Prior to undertaking this transaction, it is critical you seek advice from your accountant, adviser and solicitor. They will help coordinate the transfer while also providing advice and effective implementation. Some of the essential points they will steer you through are as follows:
- As mentioned, transfer of the property would trigger a capital gains tax (CGT) event. In Mary and Bill’s case, their accountant would be able to determine the impact of CGT and whether they would be eligible for any of the small business CGT concessions. If these concessions apply, it can effectively eliminate up to all of the CGT. In Mary and Bill’s case, if the small business concessions apply, nil CGT is payable on the transfer and on eventual sale, and nil CGT will continue to apply if they remain in pension mode. This is a massive benefit to their retirement funding. Goods and services tax implications also need to be considered and whether any of the exemptions apply.
- Mary and Bill’s financial adviser will need to work through the investment strategy of the fund with them, taking into account cash-flow and liquidity requirements and insurance, as well as the establishment of the TRIS.
- Their solicitor will need to advise on any stamp duty consequences and whether any concessions are available, prepare new lease agreements and transfer documents, as well as discuss and implement any estate planning requirements in relation to the increased member account balances in the SMSF.
- Therefore, transferring your business premises can provide many significant benefits while giving you the ability to transfer wealth into your superannuation for your retirement. However, it is critical you seek advice on all aspects of the transaction because it can be an expensive exercise if not done properly.