SMSF & Property

[Meisterin]

Just wonder what people would do in following situation.

My parents must put their commercial strata unit into SMSF to gain CGT exemption. They have two options:

1. Sell and put the proceeds into SMSF. The property has been valued at $1 MIL- $1.2 MIL.

2. Transfer the property into SMSF and rent the commercial strata unit out and get around $70K (minus $10K outgoings) per year. This would incur stamp duty in excess of $40K and around $10-20K in organising borrowing money of around $1MIL-$1.2MIL to allow SMSF to buy the commercial unit.

They are both over 55 and are not entitled to Centrelink pension and do not have much in Super so what they will be living off will be income or sale proceeds derived from this commercial unit. They need approx $45K per year for living expenses and approx $30K every three years for major expenses such as buying a car (they'll never buy anything more than a commodore) or doing major reno on PPOR etc

 

[XBenX]

2. Transfer the property into SMSF and rent the commercial strata unit out and get around $70K (minus $10K outgoings) per year. This would incur stamp duty in excess of $40K and around $10-20K in organising borrowing money of around $1MIL-$1.2MIL to allow SMSF to buy the commercial unit.

Not sure if I grammatically understood your post, but if what you are suggesting is that the SMSF borrows to purchase the property you can no longer do this. From memory 1999 was the cut off date for new loans.

 

[Mry]

My parents must put their commercial strata unit into SMSF to gain CGT exemption.

You may want to consider your base assumptions. Transferring it to an SMSF will incur CGT in their own names to begin with. True once it is in the fund CGT will be a thing of the past but the sale proceeds would be deemed to be at current market value.

Anyway questions for you.
1 - Do they have any money in super at all at present? About how much?
2 - How long have they owned it?
3 - Do they currently or have they ever run a business from it themselves?
4 - What is their current income from? Employment or just this property?

 

[Meisterin]

You may want to consider your base assumptions. Transferring it to an SMSF will incur CGT in their own names to begin with. True once it is in the fund CGT will be a thing of the past but the sale proceeds would be deemed to be at current market value.

Went and seen accountant & tax lawyer and confirmed that this is the only way to minimise CGT because that is and has been and "active business asset"- only used it to run biz and no rental income has been derived at anytime.

Anyway questions for you.
1 - Do they have any money in super at all at present? About how much?
2 - How long have they owned it?
3 - Do they currently or have they ever run a business from it themselves?
4 - What is their current income from? Employment or just this property?

1. about $100K
2. since 1992
3. yes
4. interest income from their money in bank and some from the biz in the form of dividends as shareholders.

My parents are trying to sell and lease at the same time to see to see what kind of opportunities are available to them. At this point in time they are inclined to sell because of the simplicity. But I think they may be able to make more money if they lease it out for 5 -10 years and sell it in SMSF and also get CGT exemption.

Just thought what other people might do in this case. Put the warehouse in SMSF and lease it out and go into income phase and live on rent(which is tax free) or to sell and put the cash into SMSF and either (1) invest the money for income or (2) buy complying pension streams and get Centrelink gov pension.

Thank you Mry

 

[Mry]

Went and seen accountant & tax lawyer and confirmed that this is the only way to minimise CGT because that is and has been and "active business asset"- only used it to run biz and no rental income has been derived at anytime.

You should be speaking to these people about the CGT exemptions for small businesses. I can think of various strategies here that would get them what they want tax free but the should be talking to professionals (especially financial planners) and thinking of what they want to have as their investment mix on retirement. One of the things I am sure that will get mentioned is that having all of your retirement funds tied up in one asset may not be good.

 

[XBenX]

Not sure if I grammatically understood your post, but if what you are suggesting is that the SMSF borrows to purchase the property you can no longer do this. From memory 1999 was the cut off date for new loans.

SMSF borrowing as per the initial post by hiflo?

"borrowing money of around $1MIL-$1.2MIL to allow SMSF to buy the commercial unit"

 

[coopranos]

I cannot stress enough the importance of them seeing a good financial planner about this. Doing something off the cuff without going through it with a financial planner & accountant could lead to a stupid decision that costs a huge amount of tax, which will give their retirement plans a big hit.
The planner will be able to run all the scenarios for you, show you tax/income implications, etc. Tax laws relating to superannuation (especially SMSF) can be confusing enough, so without sitting down with your parents and going through real figures, real retirement plans, etc it is highly likely they are going to make a decision they will regret.
Planners deal with this stuff every day, and will be able to think of options you wouldnt have.

Also, super funds cannot borrow money directly.

 

[Meisterin]

SMSF borrowing as per the initial post by hiflo?

"borrowing money of around $1MIL-$1.2MIL to allow SMSF to buy the commercial unit"

As my parents do not have $1MIL in their Super, they will have to borrow $1MIL(by mortgagin PPOR and personal loan and whatever) and put it into Super and get the super to buy it from them.

 

[XBenX]

That gets around the SMSF borrowing.

Step One - Parents borrow against IP - $1M
Step Two - Parents make $1M contribution to SMSF
Step Three - SMSF purchases IP from Parents - parents pay out $1M loan. SMSF now owns IP unencumbered.

 

[coopranos]

I cant see a lender doing this. I am pretty sure you can contribute real property to the super fund.
Also I cant really see this being the most effective strategy from both a tax and planning point of view.
GO SEE A FINANCIAL PLANNER!!!

 

[JIT]

I thought a SMSF cannot buy property from a related party? and you really need the property to be owned by a unit trust, for this sort of transfer to occur?

Accountants?

GSJ

 

[Mry]

A super fund can buy commercial property and shares off the superfund members without breaching the in house asset rules.

 

[sailor]

A super fund can buy commercial property and shares off the superfund members without breaching the in house asset rules.

Yep, sold my shares to my SMSF one year. Twas all good.

 

[JIT]

Ah, thanks. It's residential property where it gets more complicated.

GSJ

 

[sailor]

With resi property, I expect there would be CGT and SD, etc to pay on the transfer?

 

[XBenX]

Correct, that would be the case with any asset.

Master Superannuation Guide - is helpful for all these issues. It is the FP's reference guide anyway.

http://www.cch.com.au/fe_ps_details.asp?product_id=4791&top_selling=true&bhcp=1

Regarding acquisitions from members here is what the ATO deputy commissioner thinks....

"One restriction to which I would draw your attention, since we have found evidence it was in some cases being ignored, is the acquisition of assets from a related party of the fund.

This is prohibited except in certain cases. Such an acquisition would be permitted if:

The asset is an in house asset and satisfies all conditions such as not resulting in all the fund’s in-house assets exceeding the 5% limit;
It is an asset specifically excluded from being an in-house asset; or
If the asset is a listed security, such as shares, bonds etc which is listed on an approved stock exchange
A recent concession to SMSFs to which I would draw your attention, is their ability to invest up to 100% of the fund’s assets in business real property.

We have had a discussion paper circulating on business real property and received an important submission only last month. This is now under consideration.

I would point out that we have found that most of the industry views we received agree with the Tax Office’s interpretation of the law and this will be reflected in the final document which is close to completion.

I would add that although the law allows trustees to invest 100% of the funds assets in business real property, a question does remain as to whether having all of a funds assets in one basket as it were, represents a prudent investment strategy and its an issue trustees might well consider.

I would also draw to your attention the fact that residential property rarely fits the conditions necessary for it to be considered “business real property”, which is something else trustees and their advisors should bear in mind."