Ask Max: Your questions answered

How to transfer a commercial property into an SMSF, plus tax deductions for electric cars.

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report subscribers.

This week:

  • Transferring property into a DIY fund.
  • Can I sell my inherited equities and put the proceeds into my SMSF as non-concessional contributions?
  • Subdividing and capital gains tax.
  • What costs am I able to claim on my electric car?

Commercial property

I have a commercial property (strip shop with flat above) which I have owned for a number of years. There is no money owing on the property and I would like to transfer it to my SMSF. I am aware that the rules are very tight in this area and that because the property has a residential component I am not able to do this transfer.

When the tenant upstairs moves out, can I then rent the flat to a small business as office space and meet the rules to transfer the property into the super fund? If yes, do I need to show proof by means of a commercial lease, or would a record of income from the tenant be sufficient? Is it permissible to rent the space to my husband’s business at market value or must it be rented to a tenant at 'arm’s length’?

The only property that a super fund can buy from a member is business real property. This means where a property is used to produce domestic rent, an SMSF cannot purchase this from a member. Under the relevant legislation, for a property to be classed as business real property it must be used wholly and exclusively in one or more businesses.

Thankfully for you, the business use test is applied immediately before the property transfers to an SMSF. By converting the flat into office space, you could transfer the property into your super fund.

Where the use of a property changes, such as you are contemplating, the change in use must be substantive and enduring. For this reason, it is imperative that a commercial lease is drawn up for the office space. The initial period for the lease should be for between three and five years, with multiple options to renew to ensure that the enduring commercial use requirement is satisfied.

Just as commercial property can be purchased from members, it is also the only type of property that can be rented to members and their associates. If you did this, it would be necessary to have a market appraisal done to support the rent being charged.

Non-concessional contributions

I am trying to understand what non-concessional contributions can be made to my SMSF. I received an inheritance five years ago which I invested in equities and have an income stream each year. Can I sell the equities and make a non-concessional contribution to my SMSF, or can I only contribute the dividend income received? I also have an investment property, which I am considering selling. Could any of the proceeds also be made as non-concessional contributions?

The maximum non-concessional contribution limit is $150,000 a year or $450,000 for a three-year period. Depending on how much your shares and property are worth, you could potentially get all of the proceeds into super over the next 15 months. This would be done by contributing $150,000 before June 30, 2012, $150,000 before June 30, 2013, and then $450,000 after July 1, 2013.

You could only make these contributions at these levels if you will still be under 65 at July 1, 2013, and have not exceeded the $150,000 limit in the 2010, 2011, or 2012 financial years. Having made these contributions, you would not be able to make any further non-concessional contributions until after June 30, 2016.

Family super funds

My wife and I have been operating our own SMSF for more than 10 years. I am age 76 and my wife is 71. We are both retired and receive a combined Centrelink pension of over $400 per week. The fund is a "Family Super Fund", but my wife and I are the only members.
What are the tax and inheritance implications which would apply to the fund upon the death of one of us?

There does not have to be any tax implications when one of you dies. This would only be the case if you did not appoint another trustee to join your fund or you change to having a company act as trustee. This is because your SMSF can continue after one of you dies. If this was not the case, tax could be payable by the fund when the investments are sold to either pay out or roll over your benefits.

Subdividing and CGT

In 2000, my wife and I bought our residential property of approximately 5,000 sqm. As the workload is becoming too much, we intend to subdivide, build on the new block, move into the new house and sell the old house and remaining block. My understanding is that no CGT would apply because we are selling our residence. At a later stage, when we have to sell the new house, again no CGT would be applicable because we would again be selling our residence.

However, what would happen if we don't build but sell the subdivision (new block) and stay in the old house? I believe CGT would be payable. If that is the case, what would be the basis for the CGT calculation? To create the subdivision, there are substantial development costs – realignment of the current driveway, which is 100m long; drainage and sewerage expenses, which are not within the new block's boundaries; cutting down trees, etc. Can these costs be included in the CGT calculation? Finally, because the development is in my wife's and my name, would 50% be added to each of our taxable incomes?

You are right about there being no capital gains tax payable if you sell your original home and then eventually sell the new one. If you sell the subdivided block, capital gains tax would be payable.

The cost of this block will be made up of its share of the land value of the original purchase cost of the property. To this cost will be added the share of any subdivision costs that relate to the property as a whole, and any costs directly related to the block itself. As you own the property jointly, you will each pay tax on 50% of assessable capital gain.

To be sure you can access the 50% general capital gains discount, resulting in each of you only paying tax on 25% of the profit, you should keep the subdivided block for 12 months after it has been created.

Electric cars

Could you advise on an appropriate method of claiming my home-based recharging and associated costs for the Holden Volt? This is a soon-to-be-released rechargeable vehicle. Apparently about $2.50 worth of electricity is required for a full charge (which gives about 80km to 100km of commute). Petrol is only required for a backup engine that recharges the
battery.

Specifically, how would you log the car component of home electricity consumption? If you installed solar panels at home, could they be claimed, and how? Would the costs of installing a high-amp power outlet for recharging the car also be claimed?

Tax deductions related to motor vehicles depends on what percentage they are used for business or employment purposes. To be able to claim a portion of costs relating to this new car, you would either have to keep a log book for 12 weeks, which establishes the tax deductible percentage, or be able to prove you drive at least 5,000 kilometres a year on business or employment-related matters and claim one-third of the car’s costs.

I am unsure on how you could prove how much electricity is consumed in recharging the car; you should probably seek advice from an electrician or your power supply company. Unless the solar panels or high-amp power outlet are used solely to recharge the car, you would only be able to claim a portion of their cost.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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