Given the recent lack of confidence in share markets and underperforming superannuation accounts, many individuals have considered shifting their superannuation to the more self-controlled environment of self-managed superannuation funds (SMSF). Business owners are particularly interested in this rapidly growing area for greater control of their retirement funds, flexibility of investments allowable in a SMSF structure and the ability to contribute or sell, depending on their cashflow circumstances, their business premises into the SMSF.
Legislation governing SMSF, the SIS Act, currently only allows a SMSF to acquire from a related party two types of assets. These assets are listed securities and business real property.
Business real property is defined as any freehold or leasehold interest of the entity in real property where the real property is used wholly and exclusively in one or more businesses (whether carried on by the business or not). Any business owner should seek professional advice to ensure that the property satisfies the requirements of the business test and meets the definition of business real property prior to any transfer occurring.
Benefits to transferring business real property into the superannuation environment can be to access superannuation funds prior to retirement by way of a cash purchase by the SMSF, to take advantage of a better tax environment (15 per cent tax rate while members are in accumulation phase or zero per cent tax rate when members are in pension phase), to protect the business real property if the business fails, or to boost retirement funds and lower assets held personally.
Timing of property transfers into an SMSF can be critical from a capital gains tax perspective. Transfers of business real property purchased from related parties must be transferred at current market value as if the transaction was to occur at arm’s length. This requirement does not allow for market value manipulation and heavy penalties could apply if any transfer value didn’t stand up. Obviously higher market values on transfer can result in an increased capital gain. Due to the recent decrease in property valuations being reported by the banks, now more than ever is the opportune time to take advantage of lower valuations and get the asset in a SMSF with minimal tax impact.
Transfers of this nature can occur utilising excess cash currently within the SMSF, as a cash purchase. The other way it can occur is via an in-specie transfer (not for cash). In-specie transfers are restricted by member contribution caps which are $150,000 or $450,000 per fund member (if the bring forward rule is triggered). The bring forward rule provides greater flexibility for business owners as SMSF can have up to four members allowing for a maximum of $1,800,000 in any transfer.
Recently, some State Revenue departments have not applied stamp duty to in-specie property transfers whereby no cash has changed hands. This saving can make transferring the business premises into a SMSF more attractive as this can be an expensive component of a property transfer. It should be noted that stamp duty is a state tax with no uniformity between states. It is suggested that legal advice should always be sought when dealing with stamp duty on property transfers.
Like with all SMSF investments, a long-term view should always be taken and any investment should be made with the appropriate professional advice.
Geoff Steer is a Founding Partner of Matthews Steer Chartered Accountants.
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