Transferring Business Property into Your Self-Managed Super Fund

As with any business, when it comes time to sell or transfer ownership of your company, you will need to decide how the sale proceeds are distributed. If you have a self-managed super fund (SMSF), one option is to use this as a vehicle for property investment

This means that once you have transferred ownership, all profits from rental income and capital gains can be retained in your SMSF tax-free. To do so, however, certain steps must be taken before transferring ownership of property into an SMSF.

It can be difficult to know where to start when transferring your business property into your self-managed super fund (SMSF). This blog post is designed to give you some tips that will help make this process easier.  

Let’s get started!

First things to think about

To begin, you should consult both your accountant and your tax adviser before making any decisions about the purchase of company premises by your SMSF. They have to be included in the process of any acquisition from the very beginning.

Next, you need to determine whether or not the property is appropriate for ownership by an SMSF. If the SMSF does not have enough money to buy the property outright without taking out a loan, then it must be a single asset that may be purchased.

It has to meet the requirements to be considered “business real property,” which is defined as a piece of property that is used completely and only in one or more enterprises.

Keeping in mind that the major objective of an SMSF is to provide retirement benefits for its members, it is imperative that the asset in question be one that can be considered a reliable investment.

A certified real estate appraiser must provide you with a valuation of the property before you can move forwards. This is very necessary if the SMSF does not intend to take out a loan in order to purchase the property.

On the other hand, if the SMSF has to borrow money, the lender will frequently arrange for a valuation.

Make sure that the leasing arrangement is documented, especially if the property in question is owned by your family trust and is leased out to you or anybody else. Once the SMSF has possession of the property, the lease must be on what are known as “arm’s length” terms in the business world.

Why an SMSF?

There are a wide variety of reasons why medical professionals are encouraged to purchase their premises through their SMSF. Some of these reasons include the possibility of receiving tax benefits, the protection of your assets, and direct control over your super investments.

Because it is not unusual for medical practitioners to remain in the same rooms for an extended period of time, selling your practise premises into your SMSF can potentially leave you with a tax-effective investment after you have moved out of those rooms.

How Will The SMSF Finance The Purchase?

An SMSF has a number of options available to it when it comes to purchasing real estate from its members, including outright cash purchases, full or partial loan funding, concessional and non-concessional member contributions, or a combination of any of these acquisition strategies.

The precise mix is largely determined by the amount of money already held in member accounts by the SMSF.

If you need to secure finance through debt, you will need to set up an arrangement with a bare trust or a custodial trust for the sole purpose of retaining the asset.

The trustee of the bare trust, who must be an entity to the trustee of the SMSF, is the one who purchases the property and continues to hold it in trust for the SMSF until the debt is repaid in its entirety. That connection is managed by a simple trust deed that was drafted by attorneys.

What Is The “Business Real Property” Exception?

Commonly, when people talk about “commercial real property,” they mean land and buildings that are “wholly and solely” used by the company.

Due to the fact that the requirements of the business-use test and the definition of business real property are fairly specific, you should obtain assistance to determine whether or not your circumstances are appropriate for this strategy.

Property Requirements

In order for a piece of real estate to be classified as “commercial real property,” its primary and sole function must be to serve the needs of a company. In addition, in order for it to be moved into the SMSF, it needs to be unencumbered. This means that it cannot have any loans or debts that are still due attached with it.

If you are interested in transferring a “commercial real property” with an existing debt, you may be allowed to do so if you clear the debt before you transfer the property. However, this is only an option if you are interested in transferring the property.

There are certain limited exceptions to the exclusive business use stipulation placed on farms, so the commercial property in question could be a shop, an industrial area, or even a farm.

Transferring The Property

First, the property needs to be appraised by a third party that is impartial and adequately qualified. A CGT event will also take place as a result of the property transfer, which must be recorded at the property’s current market value. It is permissible for your SMSF to do so provided that it have sufficient liquid assets to pay for the property in full.

However, because many SMSFs do not have enough capital to do this, it is feasible for you to use your non-concessional contributions cap to cover the outstanding sum. This is because many SMSFs do not have sufficient capital to do this.

You may be able to transfer the property and count the remaining $200,000 towards your non-concessional contribution cap, for instance, if the value of your property is $500,000 and your SMSF only has $300,000 in cash on hand. In this scenario, the property transfer would count towards your non-concessional contribution cap. Your SMSF may also make use of a limited recourse borrowing arrangement (LRBA) in order to acquire the property in question.

If you are intent on pursuing this course of action despite the fact that it is subject to stringent compliance requirements, it is highly recommended that you consult an attorney.

Making Use Of The CGT Retirement Concession

The capital gains tax retirement concession enables business owners to defer paying CGT on business assets with a value of up to $500,000 over the course of their lifetime. If you are over the age of 55, there are no conditions associated with this exemption. If you are younger than 55, however, you are required to invest the money in a superannuation fund in order to qualify for the exemption.

If you are under the age of 55 and want to transfer a “commercial real property” into your SMSF, you may be able to do so potentially free of any capital gains tax liability (up to the value of $500,000). This is because of the way the law is written.

If a business owner meets the requirements of both the CGT retirement exemption and the non-concessional contributions cap, it may be possible for them to transfer their commercial property into their SMSF and take advantage of a number of favourable tax provisions by doing so.

Tax Implications

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When an SMSF purchases property from one of its members, it is subject to a nominal transfer duty payment of twenty dollars (amount dependent on the state of registration).

In order for this concession to be applicable, the transaction documents—which depend on the combination of cash funding, loan funding, and member contributions—need to be drafted with extreme caution in order to fulfil the requirements of the Duties Act.

If the premises are leased to a third party and GST is paid on the rent, then it may be possible to avoid GST by transferring the premises to the SMSF “as a going concern.” In this scenario, the rent would be considered taxable income. Having said that, care needs to be taken to ensure that the transaction documents handle this issue.

The seller is going to be subject to a capital gains tax event as a result of the transfer of the premises. However, if the CGT small business concessions are available, any nett gain in capital may be reduced greatly.

That is dependent on a number of elements, one of which is the annual turnover as well as the market value of your assets. The answer to the initial question of whether or not it would be financially beneficial for you to transfer your premises to your SMSF will frequently be determined by the findings of that investigation.

The transfer of qualifying dutiable property from an SMSF member into their SMSF is eligible for a stamp duty concession under Section 62A of the Duties Act (NSW), which may be found in the Duties Act. This rule applies regardless of whether the self-managed super fund is purchasing the real property outright, will need to borrow money in order to acquire it, or is merely accepting a transfer of the property to it without paying for it. The fee for the modest transfer duty, which is $500, is due.

According to this clause, the transferor must either be the only member of the SMSF or the transferred property must be held solely for the benefit of the transferor in order for the transfer to be valid (s62A(3A)).

This indicates that there must be two or more members of the fund in order for there to be a transfer of property into the self-managed superannuation fund by one of the members. This is due to the fact that the property subject to tax must be “separated” from the other properties belonging to the fund.

The following categories will be used to divide the property:

  • The trust deed of the self-managed superannuation fund stipulates that the property is to be held expressly for the benefit of the member or members who have transferred or agreed to transfer dutiable property into the superannuation fund; and
  • The property or the proceeds from the sale of the property are ineligible to be pooled with the property held for any other member of the superannuation fund, with the exception of the member or members who are transferring or agreeing to transfer the property; and the member or members who are transferring or agreeing to transfer the property are ineligible to receive any benefits from the superannuation.
  • The member or members who are transferring or agreeing to transfer the property are the only members of the superannuation fund who can obtain an interest in the property or the proceeds from the sale of the property. No other member of the fund can obtain an interest in the property or the proceeds from the sale of the property.

Before entering into the transaction, the self-managed superannuation fund trust deed will typically need to be altered because “segregation” is a prerequisite for meeting the requirements of the regulation. It is too late to make any changes after the fact!

When a self-managed super fund needs to take out a loan in order to purchase a piece of commercial real estate, the provisions of Section 62B of the Duties Act (NSW) come into play.

According to this clause, a custodian of the trustee of a self-managed superannuation fund who declares that business real property is being held in trust for the trustee of the self-managed superannuation fund must pay a $500 transfer duty.

However, the custodian or trustee must have paid the ad valorem duty when the property was acquired, and the self-managed superannuation fund must be named in the declaration of trust in order for the trust to be valid. In addition to that, it needs to specify that consideration for the acquisition has either been provided or will be supplied.

These parts (62A and 62B) are the most crucial clauses; however, as Leigh Adams Business Lawyers are experts in the field of legal transfer obligation, you can take it from us that the comments that were made above put you in the right way.

The Method Of Sale

If everything falls into place and you make the decision to move forwards with the transfer, then all that is left to do is hire a solicitor to prepare the transaction documentation for you. They need to be familiar with the needs of all legislation pertaining to taxes, duties, and superannuation, as well as the conveyancing procedures for commercial property.

The closing procedure is very similar to that of any other commercial property transaction once these have been finalised and signed. It is not typically essential to hire a settlement agent; rather, the settlement should be handled by the attorney or other legal professional who was responsible for preparing the transaction documents.

The entire procedure typically takes at least two months, beginning to end, depending on the requirement for financing, whether the premises are held directly by you or via your family trust, and whether the premises are subject to any caveat registered by a third party medical group, as is commonly the case for premises located within privately operated hospitals or other similar establishments. The length of time the process takes can also be affected by whether or not the premises are subject to any caveat registered by a third party medical group.

What Justifies Putting Business Property in Your SMSF?

If you are planning to retire from your firm in the near future, you might choose to put the ownership of your business premise into your self-managed super fund (SMSF). Or, you might be planning to keep running the company but are searching for a more efficient approach to hang onto the property.

In either case, the technique can be helpful in the following situations:

Increase your retirement savings

  • The rental revenue can become a source of funds for your self-managed super fund (SMSF) if you buy the property and then lease it back to the business.
  • The maximum amount that members can contribute out of their earnings on investments will not be affected by rental income.

Minimise tax

  • During the time when members are in the accumulation phase, earnings would be in a position to benefit from the concessional tax regime that applies to SMSFs.
  • When participants enter the pension phase of the plan and the asset is used to provide a pension, the amount of tax that is withheld from earnings in the pension account will be reduced to zero.

Asset protection

  • Putting the assets of your company in a self-managed super fund (SMSF) could provide some degree of protection in the event that the company goes bankrupt or is sued. Take note, however, that due to variations in bankruptcy regulations, the success of this technique cannot be assured.

Security

  • Your company will likely be more stable, and you will have a better degree of control, if you do not have a landlord who is a third party.
  • This may be of assistance to you in expanding your company and putting in place business strategy with a longer-term focus.

Access funds

  • You will have easy access to your assets before retirement if you sell the property to your self-managed super fund (SMSF) for cash.
  • This can result in a cash injection into the company, which can either assist you in accumulating debt or removing existing debt.

Cut down on your personal assets

  • You will be able to lower the number of assets you have in your possession if you move the property into your SMSF.

Sell a business

  • When trying to sell a business, separating the property from the operation of the firm itself might be helpful.
  • It’s possible that a buyer would be more content to pay rent than to try to come up with the money to buy bricks and mortar.

Capital Gain Tax considerations

  • Because of the sale or transfer of your company, your company can be required to pay capital gains tax (CGT). Concessions for small businesses, on the other hand, will often completely eliminate or greatly reduce the amount of capital gains tax that must be paid.
  • Additionally, once the SMSF enters the pension phase, the subsequent sale of the property will not be subject to capital gains tax (CGT) provided that the property is being used to support a pension.
  • Even if the property is sold before any pension is started, the tax on any capital gain is still charged on a concessional basis as long as it has been kept for at least 12 months. This is the case even if the property is sold before any pension is started.

How to Transfer Commercial Real Estate to Your Self-Managed Super Fund

The transfer can be done either through a contribution to your SMSF or through the sale of an asset, depending on the cash flow circumstances of the fund. You can go one of numerous different ways:

Cash in your SMSF

Limited Recourse Borrowing Arrangement (LRBA)

  • If your fund has a limited amount of cash available, you have the option of allowing it to borrow the deficit through an LRBA in the form of a loan for the property.
  • There is also the possibility of the company itself providing the loan. If you are the owner of a business, you have the option of granting your SMSF permission to borrow money from the firm in the form of an LRBA so that your fund can purchase the property.
  • If you are considering engaging into a borrowing agreement with your SMSF, you should get the right counsel as soon as possible.

In-species transfer

  • There is also the possibility of the transfer taking place in the same species. In this particular scenario, the contribution is not made in the form of cash but rather of an asset, specifically the real estate owned by the business.
  • In this scenario, there is no exchange of monetary value; rather, the property is given to the fund “in-specie” as a contribution rather than cash.
  • However, because the value of the property is considered a contribution, the amount that can be contributed is limited by the restrictions that are placed on member contributions. CGT may also be an option.
  • This is even more appealing in certain jurisdictions because those governments have authorised a reduced or waived stamp fee on the transfer of in-species property. This is something that is subject to the regulations of the state in which the property is located. We regret to inform you that at this time, it is not accessible on any properties held in Tasmania.

Combination

  • It is also a possibility to combine the transfer of cash with the exchange of the actual item being traded.

Giving a member of a self-managed superannuation fund a pension payment in the form of real property

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During a webinar hosted by the ATO in 2015, attendees posed the question to the organisation, “Can a self-managed superannuation fund pay a pension in specie?” The response was as described below:

Any super lump sum payment can be paid by a self-managed superannuation fund through an asset transfer, often known as “paying the benefit-in-kind.” This amounts to the same thing, basically.

As a result, the resulting super lump sum payment may be made in kind if a member chooses to partially commute their pension. A pension can be paid in kind under certain circumstances, and a partial commutation might count towards a member’s minimum pension drawdown requirement. This is due to the fact that a partial commutation can count towards the necessity.

Stamp duty or transfer duty may be due even though the ATO has said that a transfer of this sort is acceptable under certain conditions.

The member who received the property would be responsible for making the payment.

There is no need to pay capital gains tax on the sale of real business property owned by a self-managed superannuation fund if the pension phase of the fund is active and the member wishing to acquire ownership of the property makes an in-specie transfer of the property.

The trust deed that was used to establish the self-managed superannuation fund will indicate whether or not such a transfer of assets is permissible.

Distribution Of Property In Specie As A Death Benefit

According to regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994, payments owed by a regulated superannuation fund must be cashed in as soon as practicable after the member of the fund has passed away in order to comply with the regulations.

These monies may be dispersed in the form of a single payment, an interim payment, or a final payment in one lump sum. That entails a change in the type of asset.

Additionally, a member’s benefits may be dispersed to them via an income stream that is comprised of a regular sequence of payments at predetermined intervals.

That being said, if a member passed away on July 1, 2012 or later, or any time after that date, the individual cannot get an income stream unless they were the dead member’s dependent.

The Perils Of Adding Commercial Property To Your SMSF

The technique of putting one’s business assets into a self-managed super fund (SMSF) is not suitable for everyone, and the material presented in this article is generic in nature.

Therefore, before taking any action, please carefully assess whether or not the approach is suitable for the specific requirements, aims, and circumstances of your business.

Before you move forwards with this plan, it is imperative that you get professional guidance in order to ensure that your specific situation is appropriately accounted for. There are potential dangers that could affect both your company and your SMSF.

It is important to keep in mind that self-managed super funds, or SMSFs, are not suitable for all investors because of the time, money, and responsibility involved in administering an SMSF. Because of these factors, it is imperative that you consult with your financial consultant before making any choices regarding investments.

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