Commercial property from parents

[Befuddled]

Hi everyone,

My parents own a commercial property which they'd like to transfer/sell to me. Reason being they're in their late 50s and would like to get rid of it in order to qualify for age pension in 6-7yrs time. They purchased the property around 8 yrs ago and have been using it to run their small business. The purchase price was around 650k.

We've sought advice from 2 different accountants (probably the wrong people to ask?) who seem to be advising opposite strategies on how to go about it.

The first suggested to sell it at a as high a value as reasonably possible (subject to borrowing power and market value). Say ~800k. The main reason is that the folks may be exempt from CGT. If i do decide to sell it down the track, I would have less CGT to pay. In return, the property would then be leases back to their business for the next few years until they retire. What I don't like about this is that commercial loans must be P/I and on a much shorter term. In addition, it would tie up most of my borrowing capacity. I currently have 1 residential IP which is neutrally geared and I'd like to be in a position to build up a sizable portfolio by purchasing an IP every couple of years for the next 15-20yrs.

The second advised transferring the property over as a gift. I'm just beginning to look into this option and i can clearly see some benefits in that it would increase by ability to borrow as it would be immediately positively geared. Personally, I see that as much more beneficial to a potential CGT savings down the track. However, I'm concerned about the ramifications on the folks' from the legal side of things. Would the ATO come knocking? (The age pension asset test seems to only be concerned with gifts within 5 yrs prior to application)

I'm wondering if the practice of gifting properties (especially commercial) is a common practice and if so how to go about executing it. Would this type of "strategising" be something financial planners would be best equipped to handle?

Any feedback would be greatly appreciated. Thanks!

 

[tobe]

Hi Befuddled. Im sure people much more qualified than me are going to give you some great responses and you'll have a much clearer idea of how to approach this.

What Im always interested in is boomers giving away assets so they can get the pension. I understand they want the best for their kids, and I understand they have been paying tax their whole lives, so they 'deserve' a pension. But still, it just seems a very odd and wierd thing to do. Maybe its a cultural thing I will never understand.

Give away an assett worth $650,000 so they can get $30ky. Why not just keep the property and live off the rent?

In terms of whether a financial planner is a good person to speak to about this, the answer is overwhelming yes. IMO the financial planning industry's sole purpose is to scam the government into paying the age pension to people who otherwise could support themselves.

 

[Befuddled]

Thanks tobe. I think it's a case of "if i can get it then why not?". I definitely agree that there are cultural factors behind it. Some view their own assets as separate to their family's, which supports the "living off the rent" idea. Others don't care who owns what as long as the overall interests of the family is maximised.

 

[Befuddled]

Can someone recommend an expert in Sydney who's an expert on these matters? I know there are plenty of pros who frequent these forums...

 

[Foxy Moron]

Hi Befuddled. It is my understanding that assets such as commercial properties or even farms can be legally 'gifted' to the next generation for nil consideration and if you do wait out the five years this transaction can be ignored for social security purposes. This would be a reasonably common transaction I would have thought. Your main concern seems to be around the ATO ramifications for your parents with all this. So you need to familiarise yourself with what is known as the "market value substitution rule" that apply to this circumstance. In basic terms for CGT (ATO) purposes the value of the transaction will be deemed to be at market value anyway despite the gifting arrangement. Therefore if the market value of the property is $800,000 then thats what they'll be deemed to be selling it for, and thats what you'll be deemed to be buying it for. Its covered in the Tax Act.

The other thing jumping out at me is that you seem keen to be debt free for the acquisition from a serviceability point of view, but IMHO this may knock you around a bit in terms of tax payments for such a positively-geared property, so be careful what you wish for. You need to strategise whether it might be smarter to consider part-purchase, part-gift as a hybrid solution.

Thirdly, sit with a skilled accountant and determine the best entity for you to use to acquire this property, rather than simply just in your name. SMSF may have a part to play in the optimum solution depending on your circumstances.
If you parents had for instance used a unit trust back in the day rather than buying in their own names it could have provided a better succession path than what you are now faced with. Just sayin.

My opinion only, not to be taken as professional advice.

 

[Befuddled]

Cheers Foxy. I think I've came across the "market value substitution rule" before. Thanks for clearing things up! I guess regardless of how to skin it we'll have to get a valuation done on the property.

Would most likely avoid being highly positively geared. The hybrid solution would balance things up a bit.

Will read up on different trusts. I think the accountant I spoke to mentioned family trusts but since this is not an at-arms-length deal it might represent some kind of conflict! Don't think the folks were aware of all these options when they acquired it. I think they had to put up their PPOR (purchased under their names) as security so it may not have been viable anyway.

 

[Terry_w]

Many issues

Gifting seems to be a bizzare strategy at first glance. On 2nd glance it seems to be a strange strategy.

Your parents must have the property unencumbered and you must have no deducctible debt?

From a legal point of view they could gift, but what are the ramifications? Nil on CGT and stamp duty as market rates will apply. Asset protection issues for both you and them. Social security issues may be nil if they wait 5 years to claim pensions.

Lots of succession issues = could still be deemed to own it if die within 3 years of the gift, other siblings, testamentary trust strategies.

The amount of money involved is significant so there are many opportunities for you to improve both your taxation aspects and asset protection aspects.

And then did they consider the SMSF side? Could be sold to a SMSF and rented back. Could be no stamp duty in NSW. Great asset protection and income tax savings - nil tax basically.

And then as the others have commented, giving away $1 so you can make 10cents doesn't make sense It would probably be better for you if they kept it, perhaps in super. maybe better for them too.

Can could be CGT free due to the small business concessions.

 

[Scott No Mates]

Devil's advocate - if you purchase it at market say $850k, are they going to pay you market rent? or if it is gifted, are they expecting rent free for the next 5 years?

Possible 3rd strategy, partial transfer to smsf and part to you or part parents?

4th option - sell % to you and % gifted

 

[Befuddled]

Lots of succession issues = could still be deemed to own it if die within 3 years of the gift, other siblings, testamentary trust strategies.

No other siblings. Does that simplify things?

And then did they consider the SMSF side? Could be sold to a SMSF and rented back. Could be no stamp duty in NSW. Great asset protection and income tax savings - nil tax basically.

I think this isn't an option for them for 2 reasons:
1. As far as I know, they have very little in superannuation. Don't really know why. I thought super was compulsory?
2. Neither are interested in looking after a SMSF.

Thanks for your insight!

 

[Paul@PFI]

The CGT issues you raise are not simple.

Sometimes commercial property can access a CGT small business concession which may allow 100% of the proceeds to super...No CGT. However its not simple and the question needs to be explored if it is even a active CGT asset. I used to assist legal, tax and other advisers and its scary how many think a rented commercial property is an active asset and can be CGT free just by thinking a sale is a retirement etc....Its far more complex,

The second option you mention may be a "in-specie" transfer to a SMSF. In NSW that may be exempt from duty but not CGT. Its kinda like gifting but the market value is still used. Its transferred for nil consideration. It ends up in a tax free (?) or very low tax rate super fund. It can also create a massive problem is a member dies..FORCING the sale. Strategy can address it.

A family trust in NSW loses the land tax threshold...May cost $6kpa extra.

In these cases what you need is some sound strategic advice that considers their long term plans. Tax, Stamp Duty, CGT concessions, GST !, Financial plan, insurance, deductibility, superannuation etc all must be considered.

 

[Paul@PFI]

Can someone recommend an expert in Sydney who's an expert on these matters? I know there are plenty of pros who frequent these forums...

Im always happy to discuss things and don't charge for initial consult.

 

[coastymike]

Paul is in sydney and nick moustacas www.strategicwealth.com.au

 

[Marty McDonald]

= 2. Neither are interested in looking after a SMSF

Are you interested in running a SMSF?

Just thinking you could all be members of the one fund and do an in specie transfer with nil stamp duty etc I believe. Maybe a few hurdles as you aren't involved with the business though?

If that's possible you get no stamps, no gct and the asset effectively passes 100% to you when they shed their mortal coils..

 

[wylie]

I thought property going into a SMSF could not be coming (purchased or gifted) from a relative?

 

[Marty McDonald]

Commercial property you can resi you can't

 

[Befuddled]

Are you interested in running a SMSF?

Just thinking you could all be members of the one fund and do an in specie transfer with nil stamp duty etc I believe. Maybe a few hurdles as you aren't involved with the business though?

If that's possible you get no stamps, no gct and the asset effectively passes 100% to you when they shed their mortal coils..

I'm open to that idea. However, wouldn't there be stamp duty somewhere along the way? The property is joint-owned under their names, so wouldn't moving it into a SMSF incur stamp duty?

 

[Marty McDonald]

Ask the professionals I know you can transfer business assets to your smsf without stamps but I'm sure it's more complicated than that

 

[Scott No Mates]

I'm open to that idea. However, wouldn't there be stamp duty somewhere along the way? The property is joint-owned under their names, so wouldn't moving it into a SMSF incur stamp duty?

You're getting the CIP as a gift and you're still worried about the stamp duty?

 

[Befuddled]

I fully accept the stamp duty. Maybe I've misunderstood Marty's comment? Seems to suggest could avoid it.

 

[Terry_w]

I think you are seriously under estimating the benefits of a SMSF. The property could possibly be transferred into the SMSF without stamp duty and without CGT. It could be geared with your parents claiming a deduction for the rent (if running their business thru it) and depending on their ages the income inside the fund could be tax exempt as well as CGT when the property sold. They can also take out money - tax free in some cases. And it could pass to their heirs tax free possibly.