Ask Max: Your questions answered

The rules on property inside SMSFs, shifting cash into a fund, and trading commodity futures.

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 members.

This week:

  • Can I move into a SMSF property once in pension phase?
  • Can we use our house proceeds to buy a property in our SMSF?
  • Should we shift cash to our fund under the three-year contribution rule?
  • Can we put a property in our fund as an after-tax contribution?
  • Are commodity futures an acceptable asset class?
  • Can we use cash within our SMSF to meet the shortfall on a property purchase?

Can I move into a SMSF property once in pension phase?

Last Saturday I read an article that said if you have a property in SMSF you could move into it yourself once you turn your pension on. Is this correct? If so, how do you handle ongoing costs, rates, insurance, etc? Are they your expense or paid by SMSF funds?

If a super fund rents a non-commercial property to a member it is classed as an in-house asset. The value of in-house assets cannot exceed 5% of the total value of the fund. This ban does not change because a member is in pension phase. There is also another ban on a person receiving their pension as in-specie payments.

If an SMSF has a residential property that a member would like the use of when they retire, it can either be sold to the member while the fund is in pension phase or to be transferred to the member as an in-specie lump sum payment when the fund is in accumulation phase. This is a complicated area of superannuation law and you should seek advice.

Can we use our house proceeds to buy a property in our SMSF?

My wife and I have an SMSF, we are both over 65 and our current home and garden are getting too much for us to manage. Can we purchase a more suitable property and renovate it with funds from our SMSF? If we do this when we sell our existing property, can we use the proceeds to buy the other property from our SMSF? The reason for doing it this way is to retain the funds within our SMSF.

As long as the investment strategy for your SMSF allows the purchase of a residential investment property there is nothing stopping you from doing what you are proposing. You will need to make sure you clearly spell out in the investment strategy of your SMSF the investment rationale for the property purchase.

Rather than just holding the property after purchasing it you should consider renting it to produce income for the super fund. It will make sense to sell the property to you and your wife while the fund is still in pension phase. This will mean no capital gains tax will be payable on any increase in value for the time that the SMSF will have owned it.

Should we shift cash to our fund under the three-year contribution rule?

My wife and I have a SMSF with assets around $1.4 million and we also have personal assets including term deposits of $600,000, which we kept out of the SMSF in case we have to help the children in some way. We are both under 65 years of age, I work part-time 30 hours per month and my wife is fully retired.

When the term deposits mature in January 2013 we were going to put them into an account in my wife’s name only to reduce any taxable income for myself. Is there any benefit of moving the $600,000 over to our SMSF under the current arrangement of bringing forward three years of non-concessional contributions?

With your wife being retired and under 65 years of age, and you wanting to reduce the income tax payable on the $600,000 term deposit, a better strategy would be making a $450,000 non-concessional contribution to your SMSF for your wife and a $150,000 non-concessional contribution for you.

As your wife has retired she could access any of these funds in the future should your children need financial help in any way. Once the contribution has been made for your wife an account-based pension should be started immediately to preserve its tax-free status.

Can we put a property in our fund as an after-tax contribution?

My husband and I have a jointly owned residential investment property which is positively geared and currently worth $340,000. It only has a small mortgage left on it. If we pay out the mortgage could we ‘contribute’ the property to our SMSF as an after-tax contribution. I know the SMSF can’t buy the property from us.

Capital gains outside of super aren’t an issue as we have some tax losses that could be used to offset them. The majority of our assets are outside super so if the ‘contribution’ is possible we would use this as the first step in getting our wealth into super over the next seven years or so before we turn 60.

The ban on an SMSF purchasing a residential property from a member or associated person also extends to making an in-specie contribution of a residential property to an SMSF. Your idea of transferring the assets you have held for retirement into your SMSF is a good one.

You should consider selling the investment property and then making a non-concessional contribution of the net sale proceeds. To make sure that there will be no capital gains tax problem with the sale of the rental property, and to maximise the amount of other investment assets that can be transferred into your SMSF, you should seek professional advice before taking any action.

Are commodity futures an acceptable asset class?

My trust deed and investment strategy document allow the trading of CFDs and futures.

Is trading commodity futures, because they show seasonal trends that are tradeable with good success, an acceptable asset class? What factors do the ATO and the Auditor look at in assessing these types of asset class transactions?

As long as the investment strategy of your SMSF allows the trading of CFDs and futures there is no reason why it could not invest in this asset class. The number of trades that you make in a year should not affect the ability of the SMSF to invest in CFDs and futures. If you are still worried you could check with the auditor of your SMSF.

Can we use cash within our SMSF to meet the shortfall on a property purchase?

I am 64 and my wife is 61 and we manage our own SMSF. We have just sold our apartment in Sydney and are buying a new property in Sanctuary Point on the south coast of NSW. To buy this property we need to cover a shortfall of approximately $100,000, which we were looking to finance on a first mortgage. We are both still able to work part-time in a family business.

Can we use the cash within our SMSF to meet the shortfall and buy the property within our SMSF? The SMSF currently has $400,000 invested in another property with $200,000 financed by a bank, $120,000 in an interest-bearing account and $50,000 in equities.

As of June 1, 2012 I have officially retired but my wife has not, but could do so if needed. If we purchased the new property in our SMSF would I be able to move the $300,000 that we clear from the sale of our unit into the SMSF without any tax or other penalty?

If the apartment had been your residence there will be no tax implications when it is sold. As long as the property being purchased at Sanctuary Point is not owned by you now, your SMSF could purchase it. You could not however occupy this property as it must be used purely for investment purposes.

I am worried that if you did buy a property in your SMSF, even if the investment strategy of your super fund allowed it, that your fund would be too heavily invested in the property sector. Before taking any action you should seek advice from someone who specialises in SMSF regulations and portfolio construction.

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.

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